10-Q

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 SEPTEMBER 30, 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 Incorporation or Organization)	(I.R.S. Employer Identification No.)
12001 North Houston Rosslyn, Houston, Texas	77086
(Address of principal executive offices)	(Zip Code)

(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 November 7, 2003: 82,297,300 shares.

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)

	September 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	33,455		$	19,011
Restricted cash—securities settlement escrow		29,581			—
Accounts receivable, net of allowance of $8,086 and $5,162		207,515			211,722
Inventory, net		158,571			166,004
Costs and estimated earnings in excess of billings on uncompleted contracts		60,275			57,346
Prepaid taxes		5,743			7,664
Assets held for sale		22,696			69,408
Other current assets		40,442			49,933
Total current assets		558,278			581,088
Property, plant and equipment, net		2,046,687			1,167,675
Goodwill, net		205,347			180,519
Intangible and other assets		62,340			74,058
Investments in non-consolidated affiliates		169,755			150,689
Total assets	$	3,042,407		$	2,154,029
LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	40,551		$	31,997
Current maturities of long-term debt		197,762			1,744
Accounts payable, trade		62,688			72,637
Accrued liabilities		150,100			189,639
Advance billings		28,794			36,156
Liabilities held for sale		957			22,259
Billings on uncompleted contracts in excess of costs and estimated earnings		21,710			14,571
Total current liabilities		502,562			369,003
Long-term debt		1,516,590			521,203
Other liabilities		52,035			137,332
Deferred income taxes		33,836			112,472
Total liabilities		2,105,023			1,140,010
Commitments and contingencies (Note 9)
Minority interest		34,628			143
Mandatorily redeemable convertible preferred securities		86,250			86,250
Common stockholders’ equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 82,422,276 and 80,815,209 shares issued, respectively		82			81
Additional paid-in capital		854,316			841,657
Deferred employee compensation—restricted stock grants		(6,101	)		(2,285	)
Accumulated other comprehensive income (loss)		2,685			(13,696	)
Retained earnings		(32,151	)		104,194
Treasury stock—253,115 common shares, at cost		(2,325	)		(2,325	)
Total common stockholders’ equity		816,506			927,626
Total liabilities and common stockholders’ equity	$	3,042,407		$	2,154,029

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

2

HANOVER COMPRESSOR COMPANY

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands of dollars, except per share amounts)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Revenues:
Domestic rentals	$	82,823		$	80,818		$	241,728		$	249,276
International rentals		49,519			53,915			151,973			143,612
Parts, service and used equipment		45,581			47,597			118,327			172,826
Compressor and accessory fabrication		27,299			26,783			85,099			85,284
Production and processing equipment fabrication		61,942			35,022			207,892			99,771
Equity in income of non-consolidated affiliates		7,581			3,782			16,873			13,928
Other		452			1,450			3,356			2,416
		275,197			249,367			825,248			767,113
Expenses:
Domestic rentals		31,833			31,130			94,043			89,358
International rentals		17,757			13,866			47,682			39,855
Parts, service and used equipment		35,307			35,236			85,781			143,904
Compressor and accessory fabrication		24,934			23,244			76,537			73,884
Production and processing equipment fabrication		56,508			28,256			186,215			84,329
Selling, general and administrative		40,164			36,769			119,658			107,644
Foreign currency translation		1,536			461			1,336			13,339
Provision for estimated cost of litigation settlement		(3,500	)		—			40,253			—
Other		2,446			—			2,951			14,837
Depreciation and amortization		56,199			30,771			126,886			82,367
Leasing expense		—			23,081			43,139			68,206
Interest expense		32,849			10,514			57,283			31,137
Goodwill impairment		—			—			—			47,500
		296,033			233,328			881,764			796,360
Income (loss) from continuing operations before income taxes		(20,836	)		16,039			(56,516	)		(29,247	)
Provision for (benefit from) income taxes		(7,940	)		6,180			(18,463	)		7,412
Income (loss) from continuing operations		(12,896	)		9,859			(38,053	)		(36,659	)
Income (loss) from discontinued operations, net of tax		761			(800	)		1,178			(606	)
Loss from write-downs of discontinued operations, net of tax		(10,908	)		—			(12,560	)		(3,883	)
Cumulative effect of accounting change, net of tax		(86,910	)		—			(86,910	)		—
Net income (loss)	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Diluted net income (loss) per share:
Net income (loss)	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Loss from discontinued operations, including write-downs, net of tax		10,147			800			11,382			4,489
Cumulative effect of accounting change, net of tax		86,910			—			86,910			—
Net income (loss) for purposes of computing diluted net income (loss) per share from continuing operations	$	(12,896	)	$	9,859		$	(38,053	)	$	(36,659	)
Basic income (loss) per common share:
Income (loss) from continuing operations	$	(0.16	)	$	0.12		$	(0.47	)	$	(0.46	)
Loss from discontinued operations, including write-downs		(0.12	)		(0.01	)		(0.15	)		(0.06	)
Cumulative effect of accounting change, net of tax		(1.07	)		—			(1.07	)		—
Net income (loss)	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Diluted income (loss) per common share:
Income (loss) from continuing operations	$	(0.16	)	$	0.12		$	(0.47	)	$	(0.46	)
Loss from discontinued operations, including write-downs		(0.12	)		(0.01	)		(0.15	)		(0.06	)
Cumulative effect of accounting change, net of tax		(1.07	)		—			(1.07	)		—
Net income (loss)	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Weighted average common and equivalent shares outstanding:
Basic		81,439			79,438			80,907			79,338
Diluted		81,439			81,255			80,907			79,338

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

3

HANOVER COMPRESSOR COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(in thousands of dollars)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net income (loss)	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Other comprehensive income (loss):
Change in fair value of derivative financial instruments, net of tax		2,106			(6,339	)		2,794			(8,837	)
Foreign currency translation adjustment		1,000			(2,040	)		13,587			604
Comprehensive income (loss)	$	(106,847	)	$	680		$	(119,964	)	$	(49,381	)

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

4

HANOVER COMPRESSOR COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands of dollars)

(unaudited)

	Nine Months Ended September 30,
	2003			2002
Cash flows from operating activities:
Net loss	$	(136,345	)	$	(41,148	)
Adjustments:
Depreciation and amortization		126,886			82,367
Amortization of debt issuance costs and debt discount		90			90
Loss from discontinued operations, net of tax		11,382			4,489
Cumulative effect of accounting change, net of tax		86,910			—
Bad debt expense		3,030			2,800
Gain on sale of property, plant and equipment		(528	)		(7,033	)
Equity in income of non-consolidated affiliates, net of dividends received		(16,770	)		(7,357	)
Loss on investments and charges for non-consolidated affiliates		—			12,100
Gain on derivative instruments		(2,078	)		(1,530	)
Provision for inventory impairment and reserves		2,838			7,826
Provision for estimated cost of litigation settlement, in excess of cash paid		35,135			—
Goodwill impairment		—			47,500
Restricted stock compensation expense		732			254
Pay-in-kind interest on Schlumberger notes		15,914			12,199
Deferred income taxes		(27,276	)		3,935
Changes in assets and liabilities, excluding business combinations:
Accounts receivable and notes		(615	)		64,249
Inventory		317			(8,997	)
Costs and estimated earnings versus billings on uncompleted contracts		16,319			25,968
Accounts payable and other liabilities		(23,799	)		(63,841	)
Advance billings		(8,496	)		(6,224	)
Other		(584	)		(6,616	)
Net cash provided by continuing operations		83,062			121,031
Net cash provided by discontinued operations		2,202			446
Net cash provided by operating activities		85,264			121,477
Cash flows from investing activities:
Capital expenditures		(105,189	)		(183,154	)
Payments for deferred lease transaction costs		(1,580	)		(1,569	)
Proceeds from sale of property, plant and equipment		21,970			51,741
Cash used for business acquisitions		(15,000	)		(7,400	)
Proceeds from business divestitures		500			—
Cash returned from non-consolidated affiliates		—			4,009
Cash used to acquire investments in and advances to non-consolidated affiliates		(401	)		—
Net cash used in continuing operations		(99,700	)		(136,373	)
Net cash provided by (used in) discontinued operations		23,729			(17,079	)
Net cash used in investing activities		(75,971	)		(153,452	)
Cash flows from financing activities:
Net borrowings on bank credit facility		15,500			35,500
Payments for debt issue costs		(831	)		(581	)
Purchase of treasury stock		—			(1,609	)
Proceeds from warrant conversions and stock options exercised		5,274			1,810
Proceeds from employee stock purchase		—			276
Net borrowings (repayments) of other debt		3,307			(2,103	)
Proceeds from employee stockholder notes		—			55
Net cash provided by continuing operations		23,250			33,348
Net cash used in discontinued operations		(18,538	)		(509	)
Net cash provided by financing activities		4,712			32,839
Effect of exchange rate changes on cash and equivalents		439			(1,869	)
Net increase (decrease) in cash and cash equivalents		14,444			(1,005	)
Cash and cash equivalents at beginning of period		19,011			23,191
Cash and cash equivalents at end of period	$	33,455		$	22,186

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

5

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 are 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, restricted 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 diluted earnings (loss) per common share (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
Weighted average common shares outstanding—used in basic earnings (loss) per common share	81,439	79,438	80,907	79,338
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock	**	1,813	**	**
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 diluted earnings (loss) per common share	81,439	81,255	80,907	79,338

** Excluded from diluted earnings (loss) per common share as the effect would have been anti-dilutive.

6

The table below indicates the potential common shares issuable which were excluded from net dilutive potential common shares issuable as their effect would be anti-dilutive (in thousands):

	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
Net dilutive potential common shares issuable:
On exercise of options and vesting of restricted stock	1,998	—	1,891	2,549
On exercise of options-exercise price greater than average market value at end of period	1,834	1,531	3,991	1,531
On exercise of warrants	4	—	4	4
On conversion of mandatorily redeemable convertible preferred securities	4,825	4,825	4,825	4,825
On conversion of convertible senior notes	4,370	4,370	4,370	4,370
	13,031	10,726	15,081	13,279

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).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Net income (loss) as reported	$	(109,953	)	$	9,059		$	(136,345	)	$	(41,148	)
Add back: Restricted stock grant expensed, net of tax		256			110			476			165
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax		(757	)		(663	)		(1,799	)		(1,539	)
Pro forma net income (loss)	$	(110,454	)	$	8,506		$	(137,668	)	$	(42,522	)
Income (loss) per share:
Basic, as reported	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Basic, pro forma	$	(1.36	)	$	0.11		$	(1.70	)	$	(0.54	)
Diluted, as reported	$	(1.35	)	$	0.11		$	(1.69	)	$	(0.52	)
Diluted, pro forma	$	(1.36	)	$	0.10		$	(1.70	)	$	(0.54	)

In July 2003, we granted 430,000 restricted shares of Hanover common stock to certain employees as part of an incentive compensation plan. The restricted stock grants vest equally over four years. As of September 30, 2003, 514,000 restricted shares were outstanding under our incentive compensation plans. We will recognize compensation expense equal to the fair value of the stock at the date of grant over the vesting period related to these grants. During the nine months ended September 30, 2003 and 2002, we recognized $732,000 and $254,000, respectively, in compensation expense related to these grants.

Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the 2003 financial statement classification as more fully discussed in Notes 11 and 13. These reclassifications have no impact on net income. See Note 13 for a discussion of discontinued operations.

2. BUSINESS ACQUISITIONS AND COMBINATIONS

2003 Acquisitions

In August 2003, we exercised our option to acquire the remaining 49% interest in Belleli Energy S.r.l. . (“Belleli”), for approximately $15 million. Belleli is an Italian-based engineering, procurement and construction company that engineers and manufactures desalination plants and heavy wall reactors for refineries and processing plants for use primarily in Europe and the Middle East. Belleli has three manufacturing facilities, one in Mantova, Italy and two in the United Arab Emirates (Jebel Ali and Hamriyah). In November 2002, Hanover increased its ownership in Belleli to 51% and began consolidating the results of Belleli’s operations. We are in the process of completing our valuation of Belleli’s intangible assets and expect that our evaluation will be completed in the fourth quarter of 2003.

7

2002 Acquisitions

In July 2002, we increased our ownership of Belleli 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.

In connection with our increase in ownership in November 2002, we had certain rights to purchase the remaining interest 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 power facility in Fresno County, California. This investment was accounted for as a consolidated subsidiary and was classified as an asset held for sale and its operating results were reported in income (loss) from discontinued operations, until sold in September 2003. See Note 13 for a discussion of discontinued operations.

In July 2002, we acquired a 49.0% interest in Wellhead Power Panoche, LLC (“Panoche”) for approximately $6.8 million and had loaned approximately $5.0 million to Panoche prior to the acquisition of our interest. Panoche is a developer and owner of a forty-nine megawatt cycle power facility in Fresno County, California, which is under contract with the California Department of Water Resources. This investment was classified as an asset held for sale and the equity income (loss) from this non-consolidated subsidiary was reported in income (loss) from discontinued operations, until sold in June 2003. See Note 13 for a discussion of 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):

	September 30, 2003		December 31, 2002
Parts and supplies	$	109,950	$	114,833
Work in progress		38,292		37,790
Finished goods		10,329		13,381
	$	158,571	$	166,004

As of September 30, 2003 and December 31, 2002 we had inventory valuation reserves of approximately $13.4 million and $14.2 million, respectively.

8

4. PROPERTY, PLANT AND EQUIPMENT

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

	September 30, 2003			December 31, 2002
Compression equipment, plants and related facilities and other rental assets	$	2,393,790		$	1,261,241
Land and buildings		90,182			86,732
Transportation and shop equipment		75,830			75,443
Other		42,537			31,888
		2,602,339			1,455,304
Accumulated depreciation		(555,652	)		(287,629	)
	$	2,046,687		$	1,167,675

During the quarter ended September 30, 2003, we recorded a $14.4 million impairment charge in depreciation expense to write-down a portion of our rental fleet to be sold or scrapped.

On July 1, 2003, we adopted the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”) as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. See Note 6 for a discussion of the impact of our partial adoption of FIN 46.

5. DEBT

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

	September 30, 2003		December 31, 2002
Belleli—factored receivables	$	22,815	$	15,970
Belleli—revolving credit facility		12,441		11,964
Other, interest at 5.0%, due 2004		5,295		4,063
Short-term debt	$	40,551	$	31,997

In November 2002, we increased our ownership in Belleli to 51%. In August 2003, we exercised our option to purchase the remaining interest not owned by us (see Note 2). Belleli has financed its operations through the factoring of its receivables. Such factoring is typically short term in nature and at September 30, 2003 bore interest at a weighted average rate of 4.0%. In addition, Belleli’s revolving credit facilities bore interest at a weighted average rate of 3.7% and 3.0% at September 30, 2003 and December 31, 2002, respectively. These revolving credit facilities expire in December 2003 and are partially secured by letters of credit issued and outstanding under Hanover’s bank credit facility of $9.4 million as of September 30, 2003.

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

	September 30, 2003			December 31, 2002
Bank credit facility	$	172,000		$	156,500
4.75% convertible senior notes due 2008		192,000			192,000
1999A equipment lease notes, interest at 3.4%, due June 2004*		194,000			—
2000A equipment lease notes, interest at 3.4%, due March 2005*		193,600			—
2000B equipment lease notes, interest at 3.4%, due October 2005*		167,411			—
2001A equipment lease notes, interest at 8.5%, due September 2008*		300,000			—
2001B equipment lease notes, interest at 8.8%, due September 2011*		250,000			—
Schlumberger note, interest at 13.5%		—			167,096
Schlumberger note, zero coupon accreting interest at 11.0%, due 2007		180,536			—
PIGAP note, interest at 6.0%, due 2053		59,756			—
Real estate mortgage, interest at 3.19%, collateralized by certain land and buildings, payable through September 2004		3,000			3,250
Other, interest at various rates, collateralized by equipment and other assets, net of unamortized discount		2,049			4,101
		1,714,352			522,947
Less—current maturities		(197,762	)		(1,744	)
Long-term debt	$	1,516,590		$	521,203

* See Note 6 for a discussion of the impact of adoption of FIN 46.

Maturities of long-term debt (excluding interest to be accrued thereon) at September 30, 2003 are (in thousands): 2003—$367; 2004—$369,511; 2005—$361,511; 2006—$407; 2007—$180,577; 2008—$492,045; and $309,934 thereafter.

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In February 2003, we executed an amendment to our bank credit facility (our “bank credit facility”) and the agreements related to certain of our compression equipment lease obligations 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 increased the commitment fee under the bank credit facility by 0.125% and increased 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 as compared to the bank credit facility prior to the amendment depends 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 our foreign subsidiaries. This amendment also restricts our capital spending to $200 million in 2003. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements.

Our bank credit facility as so amended 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 (3.4% and 3.2% weighted average interest rate at September 30, 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 bank credit facility. This fee ranges from 0.25% to 0.50% per annum and fluctuates with our consolidated leverage ratio. In addition to the drawn balance on our bank credit facility, as of September 30, 2003, we had $71.7 million in letters of credit outstanding under the bank credit facility. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets. Our bank credit facility also limits the payment of cash dividends on our common stock to 25% of our net income for the period from December 1, 2001 through November 30, 2004.

As of September 30, 2003, we were in compliance with all material covenants and other requirements set forth in our bank credit facility, agreements related to our compression equipment lease obligations and indentures. Giving effect to the covenant limitations in our bank credit facility, the liquidity available under that facility as of September 30, 2003 was approximately $25 million. Our cash balance amounted to $33.5 million at September 30, 2003. Because our bank credit facility will mature in November 2004, it will be reported as a current liability on our balance sheet for the year ended December 31, 2003, if not amended or replaced prior to such date.

While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants in our bank credit facility and the agreements related to our compression equipment lease obligations at December 31, 2003, although, with respect to certain of the covenants, a relatively small change in our actual results as compared to our current projections could cause us not to be in compliance with such covenants.

Under the February 2003 amendment, certain of the financial covenants contained in our bank credit facility and the agreements related to certain of our compression equipment lease obligations revert back to more restrictive covenants with which we must be in compliance at the end of each fiscal quarter ending after December 31, 2003, or we will be in default under the bank credit facility. With respect to the more restrictive financial covenants that will be in effect at March 31, 2004, if our bank credit facility is not amended or replaced by such date, we believe based on our current projections that we would probably not be in compliance with such covenants at such date. However, we currently have bank commitments totaling $345 million for a new bank credit facility (the “Proposed Bank Credit Facility”) with different and/or less restrictive covenants which would apply to us for fiscal quarters ending after December 31, 2003. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants contained in the Proposed Bank Credit Facility at March 31, 2004.

The bank commitments under the Proposed Bank Credit Facility expire on December 31, 2003, and if we do not close the Proposed Bank Credit Facility prior to that date, we will have to request that the banks extend their commitments. There is no assurance that the banks will extend their commitments on the same terms or at all. In addition, the closing of this Proposed Bank Credit Facility is contingent on the finalization of documentation, the contemporaneous or earlier closing of at least $275 million of specified new financing to repay the $200 million 1999A equipment lease and a portion of our bank credit facility borrowings and satisfaction of other customary conditions. There is no assurance that we will be able to satisfy all the conditions to close the Proposed Bank Credit Facility, including in particular the requirement to effect at least $275 million of new financings on required terms. If we are not able to close the Proposed Bank Credit Facility on a timely basis, then we expect to seek an amendment or waiver of the applicable financial covenants in our existing agreements. Although we believe we would be able to obtain a satisfactory amendment or waiver, there is no assurance we will be able to do so. Such an amendment or waiver could impose additional restrictions on us and could involve additional fees payable to the banks, which could be significant. If we are unable to meet the applicable financial covenants under our bank credit facility and we fail to obtain an amendment or waiver with respect thereto, then we could be in default under our bank credit facility and certain of our agreements related to our compression equipment lease obligations and other debt. A default under our bank credit facility or these agreements would trigger cross-default provisions in certain of our other debt agreements. Such defaults would have a material adverse effect on the Company’s liquidity, financial position and operations.

In addition to purchase money and similar obligations, the indentures and the agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions 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

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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 our “coverage ratio,” is greater than 2.25 to 1.0 and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereon. The indentures and agreements for our 2001A and 2001B sale leaseback transactions define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of September 30, 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 bank credit facility and up to an additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing indebtedness. We believe the Proposed Credit Facility is within the types of refinancing indebtedness allowed under these agreements.

In January 2003, we gave notice of our intent to exercise our right to put our interest in the PIGAP II joint venture back to Schlumberger. If not exercised, the put right would have expired as of February 1, 2003. Hanover acquired its interest in PIGAP II as part of its purchase of Production Operators Corporation’s natural gas compression business, ownership interest in certain joint venture projects in South America, and related assets (“POC”) from Schlumberger in August 2001. PIGAP II is a joint venture that operates a natural gas compression facility in Venezuela and is currently owned 70% by a subsidiary of The Williams Companies Inc. and 30% by us. On May 14, 2003, we entered into an agreement with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture to Schlumberger. We also agreed with Schlumberger to restructure the $150 million subordinated note that Schlumberger received from us in August 2001 as part of the purchase price for the acquisition of POC. As a result, we retained our ownership interest in PIGAP II.

A comparison of the primary financial terms of the original $150 million subordinated note and the restructured note are shown in the table below.

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%, 14.5% beginning March 1, 2004, 15.5% beginning March 1, 2005
Schlumberger First Call Rights on Hanover Equity Issuance:	None	Schlumberger had first call on any Hanover equity offering proceeds
Call Provision:	Hanover cannot call the Note prior to March 31, 2006	Callable at any time

As of March 31, 2003, the date from which the interest rate was adjusted, the $150 million subordinated note had an outstanding principal balance of approximately $171 million, including accrued interest. Under the restructured terms, the maturity of the restructured note has been extended to March 31, 2007, from the original maturity of December 31, 2005. The note is a zero coupon note with original issue discount accreting at 11.0% for its remaining life, up to a total principal amount of $262.6 million payable at maturity. 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, as defined in the note agreement, exceeds 5.18 to 1.0 as of the end of two consecutive fiscal quarters. 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 by Hanover until March 31, 2006. As agreed upon with Schlumberger, Hanover has agreed to bear the cost of and has filed a shelf registration statement with the Securities and Exchange Commission (“SEC”) covering the resale of the restructured note by Schlumberger.

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Also on May 14, 2003, we agreed with Schlumberger Surenco, an affiliate of Schlumberger, to the modification of the repayment terms of a $58 million obligation that was accrued as a contingent liability on our balance sheet since the acquisition of POC and was associated with the PIGAP II joint venture. The obligation was converted into a non-recourse promissory note (“PIGAP Note”) payable by Hanover Cayman Limited, our indirect wholly-owned consolidated subsidiary, with a 6% interest rate compounding semi-annually until maturity in December 2053. This note was paid in full in October 2003 upon closing of the project financing by the PIGAP II joint venture (see Note 14).

For financial accounting purposes, the above described changes to the restructured subordinated note and PIGAP Note were not considered an extinguishment of debt, but have been accounted for as debt modifications which resulted in no income or expense recognition related to the transaction.

6. LEASING TRANSACTIONS AND ACCOUNTING CHANGE FOR FIN 46

Leasing Transactions

We are the lessee in five transactions involving the sale of compression equipment by us to special purpose entities, which in turn lease the equipment back to us. At the time we entered into the leases, these transactions had a number of advantages over other sources of capital then available to us. The sale leaseback transactions (i) enabled us to affordably extend the duration of our financing arrangements and (ii) reduced our cost of capital.

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

Sale leaseback transactions also provided capital to us at a lower cost compared to other sources then available to us. Lenders to the special purpose entities did not require as high a rate of interest because their capital risk is mitigated by a perfected, first priority security interest in the compression equipment, as well as a residual value guarantee provided by us. The reduced capital risk associated with our sale leaseback transactions had the effect of reducing our leasing expense as compared to an unsecured borrowing. We will continue to evaluate sale leaseback transactions as well as consider other forms of financing for cost effectiveness as future capital needs arise.

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

In August 2001 and in connection with the acquisition of POC, we completed two sale leaseback transactions involving certain compression equipment. Concurrent with these transactions, we exercised our purchase option under our July 1998 operating lease for $200.0 million. Under one sale leaseback transaction, we received $309.3 million in proceeds from the sale of compression equipment. Under the second sale leaseback transaction, we received $257.8 million in proceeds from the sale of additional compression equipment. Under the first transaction, the equipment was sold and leased back by us for a seven year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $12.8 million in addition to quarterly rental payments of approximately $0.2 million. Under the second transaction, the equipment was sold and leased back by us for a ten year period and will continue to be deployed by us in the normal course of our business. The agreement calls for semi-annual rental payments of approximately $10.9 million in addition to quarterly rental payments of approximately $0.2 million. We have options to repurchase the equipment under certain conditions as defined by the lease agreements. Through September 30, 2003, we incurred transaction costs of approximately $18.6 million related to these transactions. These costs are included in intangible and other assets and are being amortized over the respective lease terms.

In October 2000, we completed a $172.6 million sale leaseback transaction of compression equipment. In March 2000, we entered into a separate $200.0 million sale leaseback transaction involving certain compression equipment. Under the March transaction, we received proceeds of $100.0 million from the sale of compression equipment at the first closing in March 2000, and in August 2000, we completed the second half of the equipment lease and received an additional $100.0 million for the sale of

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additional compression equipment. In June 1999, we completed a $200.0 million sale leaseback transaction involving certain compression equipment. Under these lease agreements, the equipment was sold and leased back by us for a five year term and will be used by us in our business. We have options to repurchase the equipment under the 2000 and 1999 leases, subject to certain conditions set forth in these lease agreements. The lease agreements call for variable quarterly payments that fluctuate with the London Interbank Offering Rate and have covenant restrictions similar to our bank credit facility. We incurred an aggregate of approximately $7.5 million in transaction costs for the leases entered into in 2000 and 1999, which are included in intangible and other assets on the balance sheet and are being amortized over the respective lease terms of the respective transactions.

The following table summarizes the proceeds and the residual guarantee (maximum exposure to loss) and the lease termination date for equipment leases (in thousands of dollars):

Lease	Sale Proceeds		Residual Value Guarantee		Lease Termination Date
1999A equipment lease	$	200,000	$	166,000	June 2004
2000A equipment lease		200,000		166,000	March 2005
2000B equipment lease		172,589		142,299	October 2005
2001A equipment lease		309,300		232,000	September 2008
2001B equipment lease		257,750		175,000	September 2011
	$	1,139,639	$	881,299

We made residual value guarantees under these lease agreements that are due upon termination of the leases and which may be satisfied by a cash payment or the exercise of our equipment purchase options under the terms of the lease agreements. The residual value guarantees and other lease terms, which are based on negotiation between Hanover and third party lessors, were supported by equipment appraisals and analysis.

In connection with the compression equipment leases entered into in August 2001, the Company was obligated to prepare registration statements and complete an exchange offering to enable the holders of the notes issued by the lessors to exchange their notes with notes 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 the Company was required to pay additional lease expense in an amount equal to $105,600 per week until the exchange offering was completed. The additional lease expense began accruing on January 28, 2002 and increased the Company’s lease expense by $5.1 million during 2002. The registration statements became effective in February 2003. The exchange offer was completed and the requirement to pay the additional lease expense ended on March 13, 2003.

In February 2003, we executed an amendment to our bank credit facility and the compression equipment leases entered into in 1999 and 2000 (see Note 5).

Accounting Change

Prior to July 1, 2003, these five lease transactions were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that, after adoption, we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the

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inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	September 30, 2003		December 31, 2002
Accrued salaries, bonuses and other employee benefits	$	29,737	$	21,024
Accrued income and other taxes		23,237		24,095
Accrued leasing expense		—		23,465
Additional purchase price for POC		—		60,740
Current portion of hedge instruments		12,233		16,082
Litigation settlement accrual		34,558		—
Accrued interest		8,325		2,939
Accrued other		42,010		41,294
	$	150,100	$	189,639

The decrease of $60.7 million for the additional purchase price for POC is due to the reclassification of a $58 million contingent liability and accrued interest associated with the PIGAP II joint venture that was restructured into the PIGAP Note (see Note 5).

8. 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 with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the counterparty and expired in July 2003. The difference paid or received on the swap transactions was recorded as an accrued liability and recognized in leasing expense in all periods before July 1, 2003, and in interest expense thereafter. Because management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty, we recognized an unrealized gain of approximately $4.1 million and $1.5 million, respectively, related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the nine months ended September 30, 2003 and 2002 and recognized an unrealized gain of approximately $0.5 million in interest expense during the three months ended September 30, 2003. Prior to July 1, 2003, these amounts, which were reported as “Change in Fair Value of Derivative Financial Instruments” in our Consolidated Statement of Operations and have been reclassified as interest and lease expense in the attached Condensed Consolidated Statement of Operations. The fair value of these interest rate swaps fluctuated with changes in interest rates over their terms and the fluctuations were 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

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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 nine months ended September 30, 2003 and 2002, we recorded income of approximately $4.3 million and a loss of $13.6 million, respectively, related to these three swaps, ($2.8 million and $8.8 million, net of tax) in other comprehensive income. As of September 30, 2003, a total of approximately $12.2 million was recorded in current liabilities and approximately $6.5 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.

9. COMMITMENTS AND CONTINGENCIES

Hanover has issued the following guarantees which are not recorded on our accompanying balance sheet:

	Term	Maximum Potential Undiscounted Payments as of September 30, 2003
		(in thousands)
Indebtedness of non-consolidated affiliates:
Simco/Harwat Consortium (1)	2005	10,296
El Furrial (1)	2013	41,027
Other:
Performance guarantees through letters of credit (2)	2003-2007	33,898
Standby letters of credit	2003-2004	37,811
Bid bonds and performance bonds (2)	2003-2007	76,290

(1) We have guaranteed the amount included above, which is a percentage of the total 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 POC acquisition purchase price, Hanover may be required to make a contingent payment to Schlumberger based on the realization of certain tax benefits by Hanover over the next 15 years. To date we have not realized any of such tax benefits or made any payments to Schlumberger in connection with them.

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 (together with subsequently filed 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 September 5, 2003, lead plaintiffs filed an amended complaint in which they continued to seek relief under Sections 10(b) and 20(a) of the Securities Exchange Act against Hanover, certain former officers and directors and our auditor, PricewaterhouseCoopers LLP, on behalf of themselves and the class of persons who purchased Hanover securities between May 4, 1999 and December 23, 2002.

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

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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 lawsuits in the United States District Court for the Southern District of Texas were consolidated on August 19 and August 26, 2002 into the Harbor Finance Partners derivative lawsuit. With that consolidation, the pending derivative lawsuits were:

Plaintiff	Defendants	Civil Action No.	Court	Date Instituted
Harbor Finance Partners, Derivatively on behalf of Hanover Compressor Company	Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Robert R. Furgason, Melvyn N. Klein, Michael A. O’Connor, and Alvin V. Shoemaker, Defendants and Hanover Compressor Company, Nominal Defendant	H-02-0761	United States District Court for the Southern District of Texas	03/01/02
Coffelt Family, LLC, derivatively on behalf of Hanover Compressor Company	Michael A. O’Connor, Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Melvyn N. Klein, Alvin V. Shoemaker, and Robert R. Furgason, Defendants and Hanover Compressor Company, Nominal Defendant	19410-NC	Court of Chancery for the State of Delaware State Court in New Castle County	02/15/02

On October 2, 2003, the Harbor Finance Partners derivative lawsuit was consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust securities class action.

On and after March 26, 2003, three plaintiffs filed separate putative class actions against Hanover, certain named individuals 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 August 1, 2003, the three ERISA class actions were consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust federal securities class action. On October 9, 2003, a consolidated amended complaint was filed by the plaintiffs in the ERISA class action against Hanover, Michael McGhan, Michael O’Connor and William Goldberg , which included the same allegations as indicated above, and was filed on behalf of themselves and a class of persons who purchased or held Hanover securities in their 401(k) Plan between May 4, 1999 and December 23, 2002.

On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to court approval, will settle the claims underlying the securities class actions, the ERISA class actions and the shareholder derivative actions described above. The terms of the proposed settlement provide for us to: (i) make a cash payment of approximately $30 million (of which $26.7 million was funded by payments from Hanover’s directors and officers insurance carriers), (ii) issue 2.5 million shares of our 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 our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing large shareholders to participate in the process to appoint two independent directors to our Board. Our independent auditor, PricewaterhouseCoopers LLP, is not a party to the settlement and will continue to be a defendant in the consolidated securities class action.

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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 Hanover common stock from their holdings or from other sources.

In connection with this settlement, we initially recorded a pre-tax charge of approximately $68.7 million ($54.0 million after tax) in our first quarter 2003 financial statements. This charge included approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note. The charge also included approximately $26.6 million, without tax benefit, for 2.5 million Hanover common shares to be funded by GKH. Because this settlement could be considered to be a related party transaction as defined in SEC Staff Accounting Bulletin 5-T, the fair value of the Hanover common shares to be paid by GKH was recorded as an expense in Hanover’s statement of operations.

As discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2003, we planned to seek guidance from the Office of the Chief Accountant of the SEC to determine whether the Hanover common shares provided by GKH should be recorded as an expense by us. After the submission of a detailed letter and discussions with the SEC Staff, the Staff informed us that it would not object to GKH’s portion of the settlement not being considered a related party transaction as defined in SEC Staff Accounting Bulletin 5-T. Accordingly, the $26.6 million charge related to the 2.5 million Hanover common shares being paid by GKH could be reversed from our first quarter 2003 financial statements.

On August 5, 2003, we filed an amendment to our Quarterly Report on Form 10-Q for the three months ended March 31, 2003 to amend our first quarter 2003 financial statements to exclude the $26.6 million charge related to the 2.5 million Hanover common shares being funded by GKH. As a result, in our first quarter 2003 financial statements, as amended, we recorded a pre-tax charge of approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note.

In addition, in the second quarter of 2003, we adjusted our estimate of the settlement and recorded an additional $1.7 million charge due to the change in the value from May 14 to June 30, 2003 of the 2.5 million Hanover common shares contributed by us to the settlement. In the third quarter of 2003, we recorded a reduction in the charge of $3.5 million to adjust our estimate of the settlement due to additional change in the value of such stock since June 30, 2003.

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):

	Amended First Quarter Estimated Settlement			Second & Third Quarter Adjustment To Estimated 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			(1,850	)		24,750
Legal fees and administrative costs		6,929			—			6,929
Total		68,773			(1,850	)		66,923
Less insurance recoveries		(26,670	)		—			(26,670	)
Net estimated litigation settlement	$	42,103		$	(1,850	)	$	40,253

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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 to us 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 our common stock trades at or above the average price of $12.25 per share 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.

As of September 30, 2003, our accompanying balance sheet includes a $30.2 million long-term liability pending approval by the courts and satisfaction of certain other conditions and $34.6 million in accrued liabilities related to amounts which are expected to be paid in the next twelve months. During the second quarter, the $26.7 million receivable from the insurance carriers and $2.8 million of our portion of the cash settlement was paid into an escrow fund and is included in the accompanying balance sheet as restricted cash. Upon approval of the settlement by the court, 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 final value of the settlement may differ significantly from the estimates currently recorded depending on the market value of our common stock when approved by the court and potential changes in the market conditions affecting the valuation of the note to be issued. Additionally, the settlement is contingent on court approval and certain other conditions. Accordingly, we will revalue our estimate of the cost of the settlement on a quarterly basis until the settlement is approved by the court.

On July 18, 2003, the parties entered into an Amended Memorandum of Understanding which did not alter the aggregate amount to be paid under the settlement described above, but in which the counsel for the named plaintiffs in the Angleopoulos and the Freeman ERISA class actions agreed to become parties to the settlement. As partial consideration therefore, it was agreed that an additional $0.8 million (for a total of $1.8 million) from the settlement fund that was previously designated for relief for the securities class actions would be reallocated to provide relief in connection with the ERISA class actions. On October 13, 2003, the parties entered into a Second Amended and Restated Memorandum of Understanding that included an additional $225,000 contribution to the settlement (to be funded equally by Hanover and GKH) and by which counsel in the Harbor Finance derivative action became a party to the settlement. As part of this arrangement, Hanover agreed to certain additional governance procedures including certain enhancements to its code of conduct.

On October 23, 2003, the parties to the Second Amended and Restated Memorandum of Understanding entered into a Stipulation of Settlement which, subject to court approval, will fully and finally resolve all of the securities class actions, ERISA class actions and shareholder derivative actions filed against Hanover and certain other individuals. PricewaterhouseCoopers LLP is not a party to the Stipulation of Settlement and will remain a defendant in the federal securities class action. On October 24, 2003, the parties moved the court for preliminary approval of the proposed settlement and sought permission to provide notice to the potentially affected persons and to set a date for a final hearing to approve the proposed settlement. The settlement, therefore, remains subject to court approval and could be the subject of an objection by potentially affected persons.

On November 14, 2002, the SEC issued a Formal Order of Private Investigation relating to the matters involved in the restatements of our financial statements. We have cooperated fully with the Fort Worth District Office Staff of the SEC and anticipate reaching a resolution of the SEC Staff’s investigation in a manner which is generally consistent with resolutions reached in similar situations. The Company understands that any resolution reached with the Staff of the Fort Worth District Office of the SEC has no legal effect until it is reviewed and, if appropriate, approved by the SEC. As such, the Company does not anticipate announcing any resolution of the SEC Staff’s investigation unless and until such resolution is approved by the SEC. While the Company does not currently anticipate that any resolution reached with the SEC would have a material adverse impact on the business, consolidated financial condition, results of operations or cash flows of the Company, there can be no assurances in this regard at this time.

As of September 30, 2003, we had incurred approximately $14.0 million in legal related expenses in connection with the internal investigations, the putative class action securities lawsuits, the derivative lawsuit and the SEC investigation. Of this amount, we advanced approximately $2.2 million on behalf of current and former officers and directors in connection with the above-named proceedings. We intend to advance 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 $4.4 million in additional legal fees and administrative expenses in connection with the settlement of the securities-related litigation, the SEC investigation and advances on behalf of current and former officers and directors for legal fees.

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On June 25, 1999, we notified the Air Quality Bureau of the Environmental Protection Division, New Mexico Environment Department of potential violations of regulatory and permitting requirements. The violations included failure to conduct required performance tests, failure to file required notices and failure to pay fees for compressor units located on sites for more than one year. We promptly paid the required fees and corrected the violations. On June 12, 2001, after the violations had been corrected, the Director of the Division issued a compliance order to us in connection with the alleged violations. The compliance order assessed a civil penalty of $15,000 per day per regulatory violation and permit; no total penalty amount was proposed in the compliance order. On October 3, 2003, the Division notified us that the total proposed penalty would be $759,072. However, since the alleged violations had been self-disclosed, that amount was reduced to $189,768. We expect to respond to the penalty assessment, challenging some of the calculations, and will propose an alternative settlement amount, which we expect to be less than $100,000.

In the ordinary course of business we are 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.

10. 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 SEC. Pursuant to the indemnification provisions of our certificate of incorporation and bylaws, we paid legal fees on behalf of certain employees, officers and directors involved in these proceedings. In connection with these proceedings, we advanced, on behalf of indemnified officers and directors, during 2002 and the first nine months of 2003, $1.1 million and $1.1 million, respectively, in the aggregate.

During 2002, $0.4 million was advanced on behalf of former director and officer William S. Goldberg; $0.3 million was advanced on behalf of former director and officer Michael J. McGhan; $0.1 million was advanced on behalf of former officer Charles D. Erwin; $0.1 million was advanced on behalf of former officer Joe S. Bradford; $0.1 million was advanced on behalf of directors Ted Collins, Jr., Robert R. Furgason, Rene Huck (former director), Melvyn N. Klein, Michael A. O’Connor (former director), and Alvin V. Shoemaker, who were elected prior to 2002; and $0.1 million was advanced on behalf of directors I. Jon Brumley, Victor E. Grijalva, and Gordon T. Hall who were elected during 2002.

During 2003, $0.3 million was advanced on behalf of former director and officer William S. Goldberg; $0.2 million was advanced on behalf of former director and officer Michael J. McGhan; $0.1 million was advanced on behalf of former officer Charles D. Erwin; $0.1 million was advanced on behalf of former officer Joe S. Bradford; and $0.4 million was advanced on behalf of various employees of the Company.

In 2001, the Company advanced cash of $2.2 million in return for promissory notes to Michael J. McGhan, Hanover’s former president and chief executive officer who resigned on August 1, 2002. The notes bore interest at 4.88%, matured on April 11, 2006, and were collateralized by personal real estate and Hanover common stock with full recourse. On May 19, 2003, Mr. McGhan paid in full the $2.2 million loan together with the applicable accrued interest.

On May 14, 2003, Hanover entered into agreements with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture, to restructure a $150 million subordinated promissory note and to modify the repayment terms of a $58 million obligation (see Notes 5 and 14).

On July 30, 2003, the Company’s subsidiary, Hanover Compression Limited Partnership (“HCLP”) entered into a Membership Interest Redemption Agreement pursuant to which its 10% interest in Energy Transfer Group, LLC (“ETG”) was redeemed, and as a result HCLP withdrew as a member of ETG. In consideration for the surrender of HCLP’s 10% membership interest in ETG, pursuant to a Partnership Interest Purchase Agreement dated as of July 30, 2003, subsidiaries of ETG sold to subsidiaries of the Company their entire 1% interest in Energy Transfer Hanover Ventures, L.P. (“Energy Ventures”). As a result of the transaction, the Company now owns, indirectly, 100% of Energy Ventures. The Company’s 10% interest in ETG was carried on the Company’s books for no value. Ted Collins, Jr., a Director of the Company, owns 100% of Azalea Partners, which in turn owns 13% of ETG.

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11. 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 became effective for Hanover on January 1, 2003. The adoption of this new standard did not have a material effect on our consolidated results of operations, cash flows or financial position.

In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements 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 became 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 became effective for interim periods beginning after June 15, 2003. We have adopted the provisions of EITF 00-21, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The 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 that are included within these financial statements.

In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights (“variable interest entities” or “VIEs”) and the determination of when and which business enterprise should consolidate the VIE in its financial statements (the “primary beneficiary”). This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest or (ii) 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. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some but not all of the variable interest they hold.

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Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that, after adoption, we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

We have a consolidated subsidiary trust that has Mandatorily Redeemable Preferred Securities outstanding which have a liquidation value of $86.3 million. These securities are reported on our balance sheet as Mandatorily Redeemable Convertible Preferred Securities. The trust may be a VIE under FIN 46 because we only have a limited ability to make decisions about its activities and we may not be the primary beneficiary of the trust. If the trust is a VIE under FIN 46, the trust and the Mandatorily Redeemable Preferred Securities issued by the trust may no longer be reported on our balance sheet. Instead, we would report our subordinated notes payable to the trust as a liability. These intercompany notes have previously been eliminated in our consolidated financial statements. The above-described changes on our balance sheet would be reclassifications. Because we are still evaluating whether we will be required to make these reclassifications and other potential changes in connection with our adoption of FIN 46, if any, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed above.

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 have adopted the provisions SFAS 149, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In May 2003, the FASB 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 for interim periods beginning after June 15, 2004. On November 7, the FASB issued Staff Position 150-4 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $34.6 million in sale leaseback obligations that are currently reported as “Minority interest” on our Condensed Consolidated Balance Sheet pursuant to FIN 46 (see Note 6). These Minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of September 30, 2003, the yield rates on the outstanding equity certificates ranged from 4.4% to 9.5%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At September 30, 2003, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

12. REPORTABLE SEGMENTS

We manage our business segments primarily based upon the type of product or service provided. We have five principal industry segments: Domestic Rentals; International Rentals; Parts, Service and Used Equipment; Compressor and Accessory Fabrication; and Production and Processing Equipment Fabrication. The Domestic and International 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 as well as sales of used equipment. The Compressor and Accessory Fabrication Segment involves the design, fabrication and sale of natural gas compression units and accessories to meet

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unique customer specifications. The Production and Processing Equipment Fabrication Segment designs, fabricates and sells equipment used in the production and treating of crude oil and natural gas and engineering, procurement and construction of heavy wall reactors for refineries and 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, provision for estimated cost of litigation settlement, 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.

The following tables present sales and other financial information by industry segment for the three months ended September 30, 2003 and 2002.

	Domestic rentals		International rentals		Parts, service and used equipment		Compressor fabrication		Production equipment fabrication		Other		Eliminations			Consolidated
	(in thousands)
September 30, 2003:
Revenues from external customers	$	82,823	$	49,519	$	45,581	$	27,299	$	61,942	$	8,033	$	—		$	275,197
Intersegment sales		—		4,785		14,100		5,569		4,658		—		(29,112	)		—
Total revenues		82,823		54,304		59,681		32,868		66,600		8,033		(29,112	)		275,197
Gross profit		50,990		31,762		10,274		2,365		5,434		8,033		—			108,858
Identifiable assets		1,589,273		823,688		71,982		86,922		256,730		213,812		—			3,042,407
September 30, 2002:
Revenues from external customers	$	80,818	$	53,915	$	47,597	$	26,783	$	35,022	$	5,232	$	—		$	249,367
Intersegment sales		—		341		7,728		11,671		1,847		4,511		(26,098	)		—
Total revenues		80,818		54,256		55,325		38,454		36,869		9,743		(26,098	)		249,367
Gross profit		49,688		40,049		12,361		3,539		6,766		5,232		—			117,635
Identifiable assets		906,725		738,315		128,282		100,437		136,352		198,505		—			2,208,618

The following tables present sales and other financial information by industry segment for the nine months ended September 30, 2003 and 2002.

	Domestic rentals		International rentals		Parts, service and used equipment		Compressor fabrication		Production equipment fabrication		Other		Eliminations			Consolidated
	(in thousands)
September 30, 2003:
Revenues from external customers	$	241,728	$	151,973	$	118,327	$	85,099	$	207,892	$	20,229	$	—		$	825,248
Intersegment sales		—		14,020		54,673		10,190		17,643		—		(96,526	)		—
Total revenues		241,728		165,993		173,000		95,289		225,535		20,229		(96,526	)		825,248
Gross profit		147,685		104,291		32,546		8,562		21,677		20,229		—			334,990
September 30, 2002:
Revenues from external customers	$	249,276	$	143,612	$	172,826	$	85,284	$	99,771	$	16,344	$	—		$	767,113
Intersegment sales		—		1,057		39,689		56,625		8,211		8,397		(113,979	)		—
Total revenues		249,276		144,669		212,515		141,909		107,982		24,741		(113,979	)		767,113
Gross profit		159,918		103,757		28,922		11,400		15,442		16,344		—			335,783

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13. 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 composed 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 statement of operations for the periods ended September 30, 2003 and 2002. We believe we will sell the majority of these assets during the remainder of 2003 or early in 2004 and the assets and liabilities are reflected as assets held for sale on our balance sheet.

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003			2002
Revenues and other:
Domestic rentals	$	1,018	$	1,126		$	4,394		$	1,126
Parts, service and used equipment		5,468		4,970			12,755			15,187
Equity in income of non-consolidated affiliates		—		—			550			—
Other		16		(192	)		(77	)		(40	)
		6,502		5,904			17,622			16,273
Expenses:
Domestic rentals		179		196			972			196
Parts, service and used equipment		3,575		3,653			8,334			9,679
Selling, general and administrative		1,425		2,361			5,380			6,223
Depreciation and amortization		—		707			—			874
Interest expense		196		216			796			216
Other		—		5			371			15
		5,375		7,138			15,853			17,203
Income (loss) from discontinued operations before income taxes		1,127		(1,234	)		1,769			(930	)
Provision for (benefit from) income taxes		366		(434	)		591			(324	)
Income (loss) from discontinued operations	$	761	$	(800	)	$	1,178		$	(606	)

Summary balance sheet data for discontinued operations as of September 30, 2003 (in thousands):

	Used Equipment		Non-Oilfield Power Generation		Total
Current assets	$	9,685	$	10,724	$	20,409
Property, plant and equipment		901		1,384		2,285
Non-current assets		—		2		2
Assets held for sale		10,586		12,110		22,696
Current liabilities		—		957		957
Liabilities held for sale		—		957		957
Net assets held for sale	$	10,586	$	11,153	$	21,739

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Loss from the write-downs of discontinued operations was $10.9 million during the three months ended September 30, 2003 and include approximately $5.6 million in write-downs for power generation assets and $5.3 million in write-downs related to our used equipment businesses. During the nine months ended September 30, 2003, loss from the write-downs of discontinued operations were $12.6 million including approximately $7.3 million related to power generation and $5.3 million related to used equipment businesses. During the nine months ended September 30, 2002, loss from the write-downs of discontinued operations were $3.9 million related to our power generation assets. The losses relate to write-downs of our discontinued operations to their estimated market value.

In May 2003, we announced that we had agreed to sell our 49% membership interest in Panoche and our 92.5% membership interest in Gates to Hal Dittmer and Fresno Power Investors Limited Partnership, 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. The Panoche transaction closed in June 2003 and the Gates transaction closed in September 2003. Total consideration for the transactions was approximately $27.2 million consisting of approximately $6.4 million in cash, $2.8 million in notes that mature in May 2004, a $0.5 million note that matures in September 2005 and the release of our obligations under a capital lease from GE Capital to Gates that had an outstanding balance of approximately $17.5 million at the time of the Gates closing. In addition, we were released from a $12 million letter of credit from us to GE Capital that was provided as additional credit support for the Gates capital lease.

14. SUBSEQUENT EVENT

In October 2003, our PIGAP II joint venture, which repressurizes oil fields in eastern Venezuela for Petroleos de Venezuela, S.A., closed a $230 million project financing that is non-recourse to Hanover. Proceeds from the loan were used to repay Williams and Hanover, based on their respective ownership percentages, for the initial funding of construction-related costs. We own 30% of the project and received approximately $78.5 million from the financing and a distribution of earnings from the project of which approximately $59 million was used to pay off the PIGAP Note described in Note 5.

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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:

• our inability to renew our short-term leases of equipment with our customers so as to fully recoup our cost of the equipment;

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

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

• the loss of market share through competition;

• the introduction of competing technologies by other companies;

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

• currency fluctuations;

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

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

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

• our inability to successfully integrate acquired businesses;

• our inability to properly implement new enterprise resource planning systems used for integration of our accounting, operations and information systems;

• our inability to retain key personnel;

• war, social unrest, terrorist attacks and/or the responses thereto;

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

• our inability to comply with covenants in our debt agreements and the agreements related to our compression equipment lease obligations;

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

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• our inability to reduce our debt relative to our total capitalization;

• our inability to execute our exit and sale strategy with respect to assets classified on our balance sheet as discontinued operations and held for sale;

• our inability to conclude the agreed-upon settlement of the securities-related litigation and adverse results in other litigation brought by plaintiffs that are not party to the settlement;

• fluctuations in 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; and

• adverse results in the pending investigation by the Securities and Exchange Commission (“SEC”).

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. Except as otherwise required by law, 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 on Form 10-K for the year ended December 31, 2002 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 the 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 a global market leader in full service natural gas compression and a leading provider of service, fabrication and equipment for oil and natural gas processing and transportation applications. We sell this equipment and provide it on a rental, contract compression, maintenance and acquisition leaseback basis to oil and natural gas production, processing and transportation companies. Founded in 1990, and a public company since 1997, our customers include both major and 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, provides solutions to customers that own their own compression equipment, but want to outsource their operations. We also fabricate compressor and oil and gas production and processing equipment 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. In addition, through our ownership of Belleli Energy S.r.l. (“Belleli”), we provide engineering, procurement and construction services primarily related to the manufacturing of heavy wall reactors for refineries and construction of desalination plants primarily for use in Europe and the Middle East.

We have grown through both internal growth and acquisitions. During 2003, we have been reducing our capital spending and are focusing on completing the integration of recent acquisitions. In addition, we previously announced our plan to reduce our headcount by approximately 500 employees worldwide and to consolidate our fabrication operations into nine 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 $18 million. Some of these cost reductions were needed to align our costs with current sales levels. During the three months ended December 31, 2002, we accrued approximately $2.8 million in employee separation costs related to the reduction in workforce. During the nine months ended September 30, 2003, we paid approximately $1.3 million in separation benefits. Since December 31, 2002, our workforce has decreased by approximately 500 employees. However, some of this workforce reduction was outside of our original headcount reduction plan and we are continuing to focus on the further consolidation of our fabrication operations.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002

REVENUES

Our total revenues increased by $25.8 million, or 10%, to $275.2 million during the three months ended September 30, 2003 from $249.4 million during the three months ended September 30, 2002. The increase resulted primarily from the inclusion of $27.3 million in revenues from Belleli which, beginning in November 2002, are included as part of our production and processing equipment business. In July 2002, we increased our ownership of Belleli 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. In August 2003, we exercised our option to purchase the remaining interest of Belleli for approximately $15.0 million in cash. The increase in revenues related to the inclusion of Belleli was partially offset by a decrease in our revenues from our international rental business.

The North American rig count increased by 30% to 1,441 at September 30, 2003 from 1,110 at September 30, 2002, and the twelve-month rolling average North American rig count increased by 15% as of September 30, 2003 to 1,307 from 1,135 at September 30, 2002. In addition, the twelve-month rolling average New York Mercantile Exchange wellhead natural gas price increased to $5.24 per Mcf at September 30, 2003 from $2.10 per Mcf at September 30, 2002. Despite the increase in natural gas prices and the recent increase in rig count, U.S. natural gas production levels have not significantly changed. We have not experienced an improvement in purchases of equipment and services by our customers, which we believe is a result of the lack of a significant increase in U.S. natural gas production levels.

Revenues from domestic rentals increased by $2.0 million, or 2%, to $82.8 million during the three months ended September 30, 2003, from $80.8 million during the three months ended September 30, 2002. The increase in revenue from domestic rentals was primarily attributable to the impact of selective price increases and a slight recent improvement in the market conditions for our domestic compression business. At both September 30, 2003 and 2002, our domestic compression horsepower utilization rate was approximately 75%.

International rental revenues decreased by $4.4 million, or 8%, to $49.5 million during the three months ended September 30, 2003 from $53.9 million during the three months ended September 30, 2002. The decrease was primarily attributable to the inclusion in rental revenues for the three months ended September 30, 2002 of approximately $7.9 million of partial reimbursements received from the renegotiation of our contracts with our Argentine customers discussed below. Excluding the 2002 reimbursement received from Argentine customers, our 2003 revenues increased by $3.5 million due to the expansion of our international rental fleet. At both September 30, 2003 and 2002, our international compression horsepower utilization rate was approximately 94%.

At September 30, 2003, our compressor rental fleet consisted of approximately 3,508,000 horsepower, a 3% decrease from the approximately 3,621,000 horsepower in the rental fleet at September 30, 2002. Domestic horsepower in our rental fleet decreased by 7% to approximately 2,583,000 horsepower at September 30, 2003 from approximately 2,782,000 horsepower at September 30, 2002. Our international horsepower increased by 10% to approximately 925,000 horsepower at September 30, 2003 from approximately 839,000 horsepower at September 30, 2002. Our overall compression horsepower utilization rate was approximately 80% at both September 30, 2003 and 2002. We continue to move idle domestic compression in our rental fleet into service in our international rental operations. In addition, during the third quarter of 2003, we retired idle units representing approximately 41,000 horsepower from our domestic rental fleet that are to be sold or scrapped.

Revenue from parts, service and used equipment decreased by $2.0 million, or 4%, to $45.6 million during the three months ended September 30, 2003 from $47.6 million during the three months ended September 30, 2002. The decrease in parts, service and used equipment revenue was primarily due to lower parts and service sales partially offset by higher used rental equipment sales and installation revenues. We believe that the decrease in parts and service revenues is primarily related to our loss of some alliance contracts in 2002 to competitors. Included in parts, service and used equipment revenue for the three months ended September 30, 2003 was $15.7 million in used rental equipment and installation sales compared to $13.5 million for the three months ended September 30, 2002.

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Revenues from compressor and accessory fabrication increased by $0.5 million, or 2%, to $27.3 million during the three months ended September 30, 2003 from $26.8 million during the three months ended September 30, 2002. Our compression equipment backlog was $33.6 million at September 30, 2003 compared to $20.4 million at September 30, 2002.

Revenues from production and processing equipment fabrication increased by $26.9 million, or 77%, to $61.9 million during the three months ended September 30, 2003 from $35.0 million during the three months ended September 30, 2002. The increase in production and processing equipment revenues is primarily due to the inclusion of $27.1 million in revenues from the inclusion of Belleli’s results in the three months ended September 30, 2003. Our production and processing equipment backlog was $27.8 million at September 30, 2003 compared to $47.3 million at September 30, 2002, excluding Belleli’s backlog of $65.6 million at September 30, 2003.

Equity in income of non-consolidated affiliates increased by $3.8 million, or 100%, to $7.6 million during the three months ended September 30, 2003, from $3.8 million during the three months ended September 30, 2002. This increase is primarily due to an improvement in results from our equity interest in Hanover Measurement and PIGAP II joint ventures.

EXPENSES

Operating expenses for domestic rentals increased by $0.7 million, or 2%, to $31.8 million during the three months ended September 30, 2003 from $31.1 million during the three months ended September 30, 2002. The gross margin from rentals was 62% during the three months ended September 30, 2003 and 61% during the three months ended September 30, 2002.

Operating expenses for international rentals increased by $3.9 million, or 28%, to $17.8 million during the three months ended September 30, 2003 from $13.9 million during the three months ended September 30, 2002. The increase was primarily attributable to increased operating costs in our international rental business associated with bringing online additional rental projects. The gross margin from international rentals was 64% during the three months ended September 30, 2003 and 74% during the three months ended September 30, 2002. Rental revenues for the three months ended September 30, 2002, included approximately $7.9 million of partial reimbursements received from the renegotiation of our contracts with our Argentine customers. This additional revenue in 2002 increased our margin by approximately 4%. Our 2003 gross margin was also affected by operational disruptions at a plant in Argentina.

Operating expenses for our parts, service and used equipment business increased by $0.1 million to $35.3 million during the three months ended September 30, 2003 from $35.2 million for the three months ended September 30, 2002. The gross margin from parts, service and used equipment was 23% during the three months ended September 30, 2003 and 26% during the three months ended September 30, 2002. Included in parts, service and used equipment revenue for the third quarter of 2003 was $15.7 million in used rental equipment and installation sales, with a 2% gross margin compared to $13.5 million in sales with a 23% gross margin for the third quarter of 2002. Our used rental equipment and installation sales (which usually have a lower margin than our parts and service sales) decreased our parts, service and used equipment gross margin by approximately 11% in the three months ended September 30, 2003 and 1% during the three months ended September 30, 2002.

Operating expenses for our compressor and accessory fabrication business increased by $1.7 million, or 7%, to $24.9 million during the three months ended September 30, 2003 from $23.2 million during the three months ended September 30, 2002. The gross margin from compressor and accessory fabrication was 9% during the three months ended September 30, 2003 and 13% during the three months ended September 30, 2002. We continue to face strong competition for new compression fabrication business, which negatively affected the selling price of our compression equipment and the related gross margins for the third quarter of 2003.

The operating expenses attributable to production and processing equipment fabrication business increased by $28.2 million, or 100%, to $56.5 million during the three months ended September 30, 2003 from $28.3 million during the three months ended September 30, 2002. The increase in production and processing equipment fabrication expenses was primarily due to the inclusion of the results of Belleli in the three months ended September 30, 2003. The gross margin attributable to production and processing equipment fabrication was 9% during the three months ended September 30, 2003 and 19% during the three months ended September 30, 2002. The decrease in gross margin was primarily attributable to increased competition in our high specification production equipment product lines and operational disruptions related to our consolidation efforts.

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Selling, general and administrative expenses increased $3.4 million, or 9%, to $40.2 million during the three months ended September 30, 2003 from $36.8 million during the three months ended September 30, 2002. The increase is primarily due to the inclusion of Belleli’s selling and general and administrative costs of approximately $2.7 million.

Foreign currency translation expense increased $1.0 million, or 233%, to $1.5 million during the three months ended September 30, 2003 from $0.5 million for the three months ended September 30, 2002.

Other expenses increased to $2.4 million during the three months ended September 30, 2003 from $0 for the three months ended September 30, 2002. This increase was due to $2.4 million in charges primarily to write off certain non-revenue generating assets and to record the estimated settlement of a contractual obligation.

Depreciation and amortization increased by $25.4 million, or 83%, to $56.2 million during the three months ended September 30, 2003 compared to $30.8 million during the three months ended September 30, 2002. The increase in depreciation was primarily due to (i) $14.4 million of impairments recorded in the third quarter for rental fleet assets to be sold or scrapped; (ii) additions to the rental fleet, including maintenance capital, which were placed in service in the fourth quarter of 2002 and the first nine months of 2003 that are included in our depreciable asset base; (iii) approximately $4.2 million in additional depreciation expense related to the adoption of FASB Interpretation No. 46 (see “Cumulative Effect of Accounting Change” below); and (iv) $1.2 million in depreciation and amortization expense from the inclusion of Belleli.

Leasing expense decreased $23.1 million to $0 during the three months ended September 30, 2003. Beginning in July 2003, payments accrued under our sale leaseback transactions are included in interest expense as a result of consolidating the entities that lease compression equipment to us. See “Cumulative Effect Of Accounting Change” below.

Interest expense increased by $22.3 million, or 212%, to $32.8 million during the three months ended September 30, 2003 from $10.5 million for the three months ended September 30, 2002. Beginning in July 2003, our interest expense includes the payments accrued under our sale leaseback transactions of approximately $20.9 million. See “Cumulative Effect Of Accounting Change” below. We have reclassified the distributions on our mandatorily redeemable convertible securities as interest expense; and prior periods’ financial statements have been reclassified to conform to the 2003 financial statement classification.

PROVISION FOR ESTIMATED COST OF LITIGATION SETTLEMENT

On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to court approval, will settle the securities class actions, the ERISA class actions and the shareholder derivative actions described in Note 9 in Notes to Condensed Consolidated Financial Statements included in this Form 10-Q.

The final value of the settlement may differ significantly from the estimates currently recorded depending on the market value of our common stock when the settlement is approved by the court and potential changes in the market conditions affecting the valuation of the note to be issued. In the third quarter of 2003, we recorded a $3.5 million reduction of the estimated litigation settlement expense for the change in market value of the 2.5 million shares of Hanover common stock that will be issued by the company as part of the securities-related litigation settlement.

Additionally, the settlement is contingent on court approval and certain other conditions. Accordingly, we will revalue our estimate of the settlement on a quarterly basis until the settlement is approved by the court.

INCOME TAXES

The provision for income taxes decreased $14.1 million to a benefit of $7.9 million during the three months ended September 30, 2003 from a provision of $6.2 million during the three months ended September 30, 2002. The decrease resulted from the decrease in income before income taxes. The average effective income tax rates during the three months ended September 30, 2003 and September 30, 2002 were 38% and 39%, respectively.

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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 from discontinued operations increased $1.6 million to income of $0.8 million during the three months ended September 30, 2003 from a loss of $0.8 million during the three months ended September 30, 2002. Loss from the write-down of discontinued operations was $10.9 million during the three months ended September 30, 2003 due to the additional write-down of our discontinued operations to their estimated market values.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

We recorded a cumulative effect of accounting change of $86.9 million net of tax, related to the partial adoption of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”) on July 1, 2003.

In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights (“variable interest entities” or “VIEs”) and the determination of when and which business enterprise should consolidate the VIE in its financial statements (the “primary beneficiary”). This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest or (ii) 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. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some but not all of the variable interest they hold. Because we are still evaluating whether we will be required to make any other potential changes in connection with our adoption of FIN 46, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed below.

Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that, after adoption, we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million , including improvements made to these assets after the sale leaseback transactions.

NET INCOME (LOSS)

Net income decreased by $119.0 million to a loss of $110.0 million during the three months ended September 30, 2003 from income of $9.0 million during the three months ended September 30, 2002. Net income decreased primarily due to the inclusion in the three months ended September 30, 2003 of a cumulative effect of accounting change of $133.7 million ($86.9 million net of tax), the write-down of certain non-core assets as discontinued operations of $16.3 million ($10.6 million after tax), and impairments recorded for rental fleet assets to be sold or scrapped of $14.4 million ($9.8 million after tax).

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NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2002

REVENUES

Our total revenues increased by $58.1 million, or 8%, to $825.2 million during the nine months ended September 30, 2003 from $767.1 million during the nine months ended September 30, 2002. The increase resulted primarily from the inclusion of $95.0 million in revenues from Belleli which, beginning in November 2002, are included as part of our production and processing equipment business. The increase in revenues related to the inclusion of Belleli was partially offset by a decrease in revenues from our domestic rental and parts, service and used equipment businesses.

The North American rig count increased by 30% to 1,441 at September 30, 2003 from 1,110 at September 30, 2002, and the twelve-month rolling average North American rig count increased by 15% as of September 30, 2003 to 1,307 from 1,135 at September 30, 2002. In addition, the twelve-month rolling average New York Mercantile Exchange wellhead natural gas price increased to $5.24 per Mcf at September 30, 2003 from $2.10 per Mcf at September 30, 2002. Despite the increase in natural gas prices and the recent increase in rig count, U.S. natural gas production levels have not significantly changed. We have not experienced an improvement in purchases of equipment and services by our customers, which we believe is a result of the lack of a significant increase in the U.S. natural gas production levels.

Domestic rentals revenues decreased by $7.6 million, or 3%, to $241.7 million during the nine months ended September 30, 2003 from $249.3 million during the nine months ended September 30, 2002. The decrease in domestic revenues was primarily attributable to weaker demand and stronger competition for domestic compression which resulted in a lower utilization of our rental fleet during the nine months ended September 30, 2003. Our average domestic utilization for the nine months ended September 30, 2003 was approximately 4% lower than our average utilization for the nine months ended September 30, 2002. At both September 30, 2003 and 2002, our domestic compression horsepower utilization rate was approximately 75%.

International rental revenues increased by $8.4 million, or 6%, to $152.0 million during the nine months ended September 30, 2003 from $143.6 million during the nine months ended September 30, 2002. International rental revenues increased primarily from: (i) the expansion of our business operations, (ii) the recognition of approximately $2.7 million in billings to Venezuelan customers in the first nine months of 2003 which were not recognized in 2002 due to concerns about the ultimate receipt of these revenues 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 both September 30, 2003 and 2002, our international compression horsepower utilization rate was approximately 94%.

At September 30, 2003, our compressor rental fleet consisted of approximately 3,508,000 horsepower, a 3% decrease from the approximately 3,621,000 horsepower in the rental fleet at September 30, 2002. Domestic horsepower in our rental fleet decreased by 7% to approximately 2,583,000 horsepower at September 30, 2003 from approximately 2,782,000 horsepower at September 30, 2002. In addition, international horsepower increased by 10% to approximately 925,000 horsepower at September 30, 2003 from approximately 839,000 horsepower at September 30, 2002. Our overall compression horsepower utilization rate was approximately 80% at both September 30, 2003 and 2002. We continue to move idle domestic compression in our rental fleet into service in our international rental operations. In addition, during the third quarter of 2003 we retired idle units representing approximately 41,000 horsepower from our domestic rental fleets that are to be sold or scrapped.

Revenue from parts, service and used equipment decreased by $54.5 million, or 32%, to $118.3 million during the nine months ended September 30, 2003 from $172.8 million during the nine months ended September 30, 2002. The decrease in parts and service revenue was primarily due to lower used rental equipment sales and installation revenues, the loss of some customer alliance contracts to competitors and lower spending levels than what we anticipated from our customers. Included in parts, service and used equipment revenue for the nine months ended September 30, 2003 was $27.7 million in used rental equipment and installation sales compared to $64.9 million for the nine months ended September 30, 2002.

Revenues from compressor and accessory fabrication decreased by $0.2 million, or 0.2%, to $85.1 million during the nine months ended September 30, 2003 from $85.3 million during the nine months ended September 30, 2002.

Revenues from production and processing equipment fabrication increased by $108.1 million, or 108%, to $207.9 million during the nine months ended September 30, 2003 from $99.8 million during the nine months ended September 30, 2002. The increase in production and processing equipment revenues is primarily due to the inclusion of $94.1 million in revenues from the results of Belleli.

Equity in income of non-consolidated affiliates increased by $3.0 million, or 21%, to $16.9 million during the nine months ended September 30, 2003, from $13.9 million during the nine months ended September 30, 2002. This increase is primarily due to an improvement in results from our equity interest in Hanover Measurement and PIGAP II joint ventures.

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EXPENSES

Operating expenses for domestic rentals increased by $4.6 million, or 5%, to $94.0 million during the nine months ended September 30, 2003 from $89.4 million during the nine months ended September 30, 2002. The gross margin from domestic rentals was 61% during the nine months ended September 30, 2003 and 64% during the nine months ended September 30, 2002. The decrease in gross margin was due to a lower overall utilization of our domestic rental fleet without a corresponding decrease in overhead and expenses and $0.9 million expensed in the second quarter for startup and commissioning costs associated with a gas plant facility that began operations in the third quarter of 2003.

Operating expenses for international rentals increased by $7.8 million, or 20%, to $47.7 million during the nine months ended September 30, 2003 from $39.9 million during the nine months ended September 30, 2002. The increase was primarily attributable to the corresponding increase in international rental revenues. The gross margin from international rentals was 69% during the nine months ended September 30, 2003 and 72% during the nine months ended September 30, 2002.

Operating expenses for our parts, service and used equipment business decreased by $58.1 million, or 40%, to $85.8 million during the nine months ended September 30, 2003 from $143.9 during the nine months ended September 30, 2002. The decrease was primarily related to the corresponding 32% decrease in parts, service and used equipment revenue and an increase in gross margin. The gross margin from parts, service and used equipment was 28% during the nine months ended September 30, 2003 and 17% during the nine months ended September 30, 2002. During the nine months ended September 30, 2002, we recorded approximately $6.1 million in inventory write-downs and reserves for parts inventory that was either obsolete, excess or carried at a price above market value. Also, included in parts, service and used equipment revenue for the nine months ended September 30, 2003 was $27.7 million in used rental equipment and installation sales, with a 16% gross margin compared to $64.9 million in sales with an 11% gross margin for the nine months ended September 30, 2002. Our used rental equipment and installation sales (which usually have a lower margin than our parts and service sales) decreased our parts, service and used equipment gross margin by approximately 4% in the nine months ended September 30, 2003. The inventory write-down and used rental equipment and installation sales reduced our total parts, service and used equipment gross margin by approximately 9% in the nine months ended September 30, 2002.

Operating expenses for our compressor and accessory fabrication business increased by $2.6 million, or 4%, to $76.5 million during the nine months ended September 30, 2003 from $73.9 million during the nine months ended September 30, 2002. The gross margin on compressor and accessory fabrication was 10% during the nine months ended September 30, 2003 and 13% during the nine months ended September 30, 2002. We continue to face strong competition for new compression fabrication business, which negatively affected the selling price of our compression equipment and the related gross margins during 2003.

The operating expenses attributable to production and processing equipment fabrication business increased by $101.9 million, or 121%, to $186.2 million during the nine months ended September 30, 2003 from $84.3 million during the nine months ended September 30, 2002. The increase in production and processing equipment fabrication expenses was primarily due to the consolidation of the results of Belleli in the nine months ended September 30, 2003. The gross margin attributable to production and processing equipment fabrication was 10% during the nine months ended September 30, 2003 and 15% during the nine months ended September 30, 2002. Of the decrease in gross margin for production and processing equipment fabrication, 2% was attributable to the inclusion of Belleli. The remaining decrease in gross margin was primarily attributable to increased competition and operational disruptions related to our consolidation efforts.

Selling, general and administrative expenses increased $12.0 million, or 11%, to $119.7 million during the nine months ended September 30, 2003 from $107.7 million during the nine months ended September 30, 2002. The increase is primarily due to the inclusion of Belleli’s selling, general and administrative costs of approximately $7.6 million and an increase in payroll and consulting costs related to our focus on improving our organizational structure to facilitate the consolidation of our operations.

Foreign currency translation for the nine months ended September 30, 2003 resulted in a loss of $1.3 million, compared to a loss of $13.3 million for the nine months ended September 30, 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 were reached, a preliminary payment could be made based on a one dollar to one 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 nine months ended September 30, 2002, we recorded an exchange loss of approximately $11.9 million and $1.9 million for assets exposed to currency translation in Argentina and Venezuela, respectively,

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and recorded a translation gain of approximately $0.5 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 nine months of 2003.

Other expenses decreased by $11.9 million, or 80%, to $2.9 million during the nine months ended September 30, 2003 from $14.8 million for the nine months ended September 30, 2002. For the nine months ended September 30, 2003, other expenses included $2.9 million in charges primarily recorded to write off certain non-revenue producing assets and to record the estimated settlement of a contractual obligation. For the nine months ended September 30, 2002, other expenses included a $12.1 million write-down of investments in three non-consolidated affiliates that have experienced a decline in value that we believe to be other than temporary, a $0.5 million write-off of a purchase option for an acquisition that we have abandoned and a $2.0 million write-down of a note receivable from Aurion Technologies, Inc.

Depreciation and amortization increased by $44.5 million, or 54%, to $126.9 million during the nine months ended September 30, 2003 compared to $82.4 million during the nine months ended September 30, 2002. The increase in depreciation was primarily due to (i) $14.4 million of impairments recorded for rental fleet assets to be sold or scrapped, (ii) additions to the rental fleet, including maintenance capital, which were placed in service in 2002 and the first nine months of 2003 that are included in our depreciable asset base, (iii) $4.2 million in additional depreciation expense related to the adoption of FIN 46, and (iv) $3.1 million in depreciation and amortization expense from the inclusion of Belleli.

Leasing expense decreased $25.1 million, or 37%, to $43.1 million during the nine months ended September 30, 2003 from $68.2 million for the nine months ended September 30, 2002. Beginning in July 2003, payments accrued under our sale leaseback transactions are included in interest expense as a result of consolidating the entities that lease compression equipment to us. See “Cumulative Effect Of Accounting Change” below.

Interest expense increased by $26.2 million, or 84%, to $57.3 million during the nine months ended September 30, 2003 from $31.1 million for the nine months ended September 30, 2002. Beginning in July 2003, our interest expense includes the payments accrued under our sale leaseback transactions of approximately $20.9 million. See “Cumulative Effect Of Accounting Change” below. In addition, our interest expense increased due to an increase in the outstanding balance of the debt payable to Schlumberger and the inclusion of Belleli’s interest expense of approximately $1.5 million. We have reclassified the distributions on our mandatorily redeemable convertible securities as interest expense; and prior periods’ financial statements have been reclassified to conform to the 2003 financial statement classification.

Due to a downturn in our business and changes in the business environment in which we operate, we completed a goodwill impairment analysis as of June 30, 2002. As a result of the analysis performed, we recorded an estimated $47.5 million impairment of goodwill attributable to our production and processing equipment fabrication business unit during the nine months ended September 30, 2002.

PROVISION FOR ESTIMATED COST OF LITIGATION SETTLEMENT

October 23, 2003, we entered into a Stipulation of Settlement, which, subject to court approval, will settle the securities class actions, the ERISA class actions and the shareholder derivative actions described in Note 9 above. The terms of the proposed settlement provide for us to: (i) make a cash payment of approximately $30 million (of which $26.7 million was funded by payments from our directors and officers insurance carriers), (ii) issue 2.5 million shares of our 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 our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing large shareholders to participate in the process to appoint two independent directors to our Board. Our auditor, PricewaterhouseCoopers LLP, 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 our outstanding common stock and which sold shares in our 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 our common stock from their holdings or from other sources.

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In connection with this settlement, we initially recorded a pre-tax charge of approximately $68.7 million ($54.0 million after-tax) in our first quarter 2003 financial statements. This charge included approximately $42.1 million ($27.4 million after-tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note. The charge also included approximately $26.6 million, without tax benefit, for 2.5 million Hanover common shares to be funded by GKH. Because this settlement could be considered to be a related-party transaction as defined in SEC Staff Accounting Bulletin 5-T, the fair value of the Hanover common shares to be paid by GKH was recorded as an expense in our statement of operations.

As discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2003, we planned to seek guidance from the Office of the Chief Accountant of the SEC to determine whether the Hanover common shares provided by GKH should be recorded as an expense by us. After the submission of a detailed letter and discussions with the SEC Staff, the Staff informed us that it would not object to GKH’s portion of the settlement not being considered a related-party transaction as defined in SEC Staff Accounting Bulletin 5-T. Accordingly, the $26.6 million charge related to the 2.5 million Hanover common shares being paid by GKH could be reversed from our first quarter 2003 financial statements.

On August 6, 2003, we filed an amendment to our Quarterly Report on Form 10-Q for the three months ended March 31, 2003 to amend our first quarter 2003 financial statements to exclude the $26.6 million charge related to the 2.5 million Hanover common shares being funded by GKH. As a result, in our first quarter 2003 financial statements, as amended, we recorded a pre-tax charge of approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note.

In addition, in the second quarter of 2003, we adjusted our estimate of the settlement and recorded an additional $1.7 million charge due to the change in the value from May 14 to June 30, 2003 of the 2.5 million Hanover common shares contributed by us to the settlement. In the third quarter of 2003, we recorded a $3.5 million reduction to adjust our estimate of the settlement due to the third quarter change in the value of such stock.

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):

	Amended First Quarter Estimated Settlement			Second and Third Quarter Adjustment To Estimated 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			(1,850	)		24,750
Legal fees and administrative costs		6,929			—			6,929
Total		68,773			(1,850	)		66,923
Less insurance recoveries		(26,670	)		—			(26,670	)
Net estimated litigation settlement	$	42,103		$	(1,850	)	$	40,253

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 to us for debt with similar terms and maturities. Using a market-borrowing rate of 11%, the principal value and the 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 our common stock trades at or above the average price of $12.25 per share 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.

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As of September 30, 2003, our accompanying balance sheet includes a $30.2 million long-term liability pending approval by the courts and satisfaction of certain other conditions and $34.6 million in accrued liabilities related to amounts that are expected to be paid in the next 12 months. During the second quarter of 2003, the $26.7 million receivable from the insurance carriers and $2.8 million of our portion of the cash settlement was paid into an escrow fund and is included in the accompanying balance sheet as restricted cash. Upon the approval of the settlement by the court, 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 final value of the settlement may differ significantly from the estimates currently recorded, depending on the market value of our common stock when the settlement is approved by the court and potential changes in the market conditions affecting the valuation of the note to be issued. Additionally, the settlement is contingent on court approval and certain other conditions. Accordingly, we will revalue our estimate of the cost of the settlement on a quarterly basis until the settlement is approved by the court.

INCOME TAXES

The provision for income taxes decreased $25.9 million, to a benefit of $18.5 million during the nine months ended September 30, 2003 from a provision of $7.4 million during the nine months ended September 30, 2002. The decrease resulted from the decrease in income before income taxes and a higher average effective tax rate on pre-tax income. The average effective income tax rates during the nine months ended September 30, 2003 and September 30, 2002 were 33% and 25%, respectively. The increase in rate was primarily due to the U.S. income tax impact of foreign operations, the relative weight of foreign income to U.S. income, and the non-deductible goodwill impairment charge recorded during the nine months ended September 30, 2002.

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 $1.8 million, to net income of $1.2 million during the nine months ended September 30, 2003, from a loss of $0.6 million during the nine months ended September 30, 2002. Loss from the write-down of discontinued operations increased $8.7 million, to a loss of $12.6 million during the nine months ended September 30, 2003 from a loss of $3.9 million during the nine months ended September 30, 2002. The losses relate to write-downs of our discontinued operations to their estimated market value.

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

We recorded a cumulative effect of accounting change of $86.9 million, net of tax, related to the partial adoption of FIN 46 on July 1, 2003.

In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights (“variable interest entities” or “VIEs”) and the determination of when and which business enterprise should consolidate the VIE in its financial statements (the “primary beneficiary”). This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest or (ii) 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. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some but not all of the variable interest they hold. Because we are still evaluating whether we will be required to make any other potential changes in connection with our adoption of FIN 46, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed below.

Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment),

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$1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior period depreciation of the compression equipment assets. Additionally, we estimate that, after adoption, we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

NET LOSS

Our net loss increased by $95.2 million to a loss of $136.3 million during the nine months ended September 30, 2003 from a loss of $41.1 million during the nine months ended September 30, 2002. Net loss increased primarily due to the inclusion in the nine months ended September 30, 2003 of (i) a cumulative effect of accounting change of $133.7 million ($86.9 million net of tax), (ii) the write-down of certain non-core assets as discounted operations of $16.3 million ($10.6 million after tax), (iii) impairments recorded for rental fleet assets to be sold or scrapped of $14.4 million ($9.8 million after tax) and the $40.3 million ($26.2 million after tax) provision for the estimated settlement cost of the securities-related litigation. This increase was partially offset by the inclusion in the nine months ended September 30, 2002 of a $47.5 million goodwill impairment charge ($44.2 million after tax) and pre-tax charges of $26.2 million ($17.0 million after tax) to write-down certain non-core assets and parts and power generation inventory.

LIQUIDITY AND CAPITAL RESOURCES

Our cash balance amounted to $33.5 million at September 30, 2003 compared to $19.0 million at December 31, 2002. Our principal source of cash during the nine months ended September 30, 2003 was approximately $85.3 million in cash flow from operations. Principal uses of cash during the nine months ended September 30, 2003 were capital expenditures of $105.2 million.

Working capital decreased to $55.7 million at September 30, 2003 from $212.1 million at December 31, 2002. The decrease in working capital was primarily due to the classification of our $194 million 1999A equipment lease note, which matures in June 2004, to current debt. This obligation was recorded on our balance sheet in July 2003 upon consolidation of the entities which lease equipment to us when we adopted FIN 46 for our sale leaseback transactions.

We invested $105.2 million in property, plant and equipment during the nine months ended September 30, 2003, primarily for international rental projects and maintenance capital. As of September 30, 2003, we had approximately 3,508,000 horsepower in the rental fleet with 2,583,000 horsepower domestically and 925,000 horsepower in the international rental fleet.

In February 2003, we executed an amendment to our bank credit facility (our “bank credit facility”) and the agreements related to certain of our compression equipment lease obligations 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 increased the commitment fee under the bank credit facility by 0.125% and increased 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 as compared to the bank credit facility prior to the amendment depends 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 our foreign subsidiaries. This amendment also restricts our capital spending to $200 million in 2003. In consideration for obtaining the amendment, we agreed to pay approximately $1.8 million in fees to the lenders under these agreements.

Our bank credit facility as so amended 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 (3.4% and 3.2% weighted average interest rate at September 30, 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 bank credit facility. This fee ranges from 0.25% to 0.50% per annum and fluctuates with our consolidated leverage ratio. In addition to the drawn balance on our bank credit facility, as of September 30, 2003, we had $71.7 million in letters of credit outstanding under the bank credit facility. Our bank credit facility contains certain financial covenants and limitations on, among other things, indebtedness, liens, leases and sales of assets. Our bank credit facility also limits the payment of cash dividends on our common stock to 25% of our net income for the period from December 1, 2001 through November 30, 2004.

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As of September 30, 2003, we were in compliance with all material covenants and other requirements set forth in our bank credit facility, agreements related to our compression equipment lease obligations and indentures. Giving effect to the covenant limitations in our bank credit facility, the liquidity available under that facility as of September 30, 2003 was approximately $25 million. Our cash balance amounted to $33.5 million at September 30, 2003. Because our bank credit facility will mature in November 2004, it will be reported as a current liability on our balance sheet for the year ended December 31, 2003, if not amended or replaced prior to such date.

While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants in our bank credit facility and the agreements related to our compression equipment lease obligations at December 31, 2003, although, with respect to certain of the covenants, a relatively small change in our actual results as compared to our current projections could cause us not to be in compliance with such covenants.

Under the February 2003 amendment, certain of the financial covenants contained in our bank credit facility and the agreements related to certain of our compression equipment lease obligations revert back to more restrictive covenants with which we must be in compliance at the end of each fiscal quarter ending after December 31, 2003, or we will be in default under the bank credit facility. With respect to the more restrictive financial covenants that will be in effect at March 31, 2004, if our bank credit facility is not amended or replaced by such date, we believe based on our current projections that we would probably not be in compliance with such covenants at such date. However, we currently have bank commitments totaling $345 million for a new bank credit facility (the “Proposed Bank Credit Facility”) with different and/or less restrictive covenants which would apply to us for fiscal quarters ending after December 31, 2003. While there is no assurance, we believe based on our current projections that we will be in compliance with the financial covenants contained in the Proposed Bank Credit Facility at March 31, 2004.

The bank commitments under the Proposed Bank Credit Facility expire on December 31, 2003, and if we do not close the Proposed Bank Credit Facility prior to that date, we will have to request that the banks extend their commitments. There is no assurance that the banks will extend their commitments on the same terms or at all. In addition, the closing of this Proposed Bank Credit Facility is contingent on the finalization of documentation, the contemporaneous or earlier closing of at least $275 million of specified new financing to repay the $200 million 1999A equipment lease and a portion of our bank credit facility borrowings and satisfaction of other customary conditions. There is no assurance that we will be able to satisfy all the conditions to close the Proposed Bank Credit Facility, including in particular the requirement to effect at least $275 million of new financings on required terms. If we are not able to close the Proposed Bank Credit Facility on a timely basis, then we expect to seek an amendment or waiver of the applicable financial covenants in our existing agreements. Although we believe we would be able to obtain a satisfactory amendment or waiver, there is no assurance we will be able to do so. Such an amendment or waiver could impose additional restrictions on us and could involve additional fees payable to the banks, which could be significant. If we are unable to meet the applicable financial covenants under our bank credit facility and we fail to obtain an amendment or waiver with respect thereto, then we could be in default under our bank credit facility and certain of our agreements related to our compression equipment lease obligations and other debt. A default under our bank credit facility or these agreements would trigger cross-default provisions in certain of our other debt agreements. Such defaults would have a material adverse effect on the Company’s liquidity, financial position and operations.

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 $150 to $175 million on capital expenditures including (i) rental equipment fleet additions, (ii) $60 million on equipment overhauls and other maintenance capital and (iii) our additional $15 million investment in Belleli. The February 2003 amendment to our bank credit facility restricts our capital spending to $200 million in 2003. We expect that our 2003 capital spending, net of proceeds from equipment sales and excluding our additional $15 million investment in Belleli, will be within operating cash flows, excluding working capital needs. As a result of our agreement to settle the securities-related litigation, we will be required to pay approximately $5.0 million in estimated expenses over the next 12 months in addition to the amount held in escrow and reported as restricted cash on our Condensed Consolidated Balance Sheet. Historically, we have funded our capital requirements with a combination of internally generated cash flow, borrowing under a bank credit facility, sale leaseback transactions, raising additional equity and issuing long-term debt.

We believe that cash flow from operations and borrowing under our bank credit facility will provide us with adequate capital resources to fund our estimated level of capital expenditures through December 31, 2003, and, if closed, the Proposed Bank Credit Facility, together with the financings contemplated by that facility and cash flow from operations will provide us adequate capital resources to fund our estimated level of capital expenditures for the near 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 were not realized. As of September 30, 2003, we had approximately $172.0 million in borrowings and approximately $71.7 million in letters of credit outstanding on bank credit facility (3.4% weighted average effective rate at September 30, 2003). The letters of credit expire between 2003 and 2007. Our bank credit facility permits us to incur indebtedness, subject to covenant limitations described above, 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 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 agreements related to our compression equipment lease obligations for our 2001A and 2001B sale leaseback transactions permit us to incur indebtedness up to the $350 million credit limit under our bank credit facility, plus (1) an additional $75 million in unsecured indebtedness and (2) any additional indebtedness so long as, after incurring such indebtedness, our ratio of the sum of consolidated net income before interest expense, income taxes, depreciation expense, amortization of intangibles, certain other non-cash charges and rental expense to total fixed charges (all as defined and adjusted by the agreements), or our “coverage ratio,” is greater than 2.25 to 1.0 and no default or event of default has occurred or would occur as a consequence of incurring such additional indebtedness and the application of the proceeds thereon. The indentures and agreements for our 2001A and 2001B sale leaseback transactions define indebtedness to include the present value of our rental obligations under sale leaseback transactions and under facilities similar to our compression equipment operating leases. As of September 30, 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 bank credit facility and up to an additional $75 million in unsecured indebtedness and certain other permitted indebtedness, including certain refinancing indebtedness. We believe the Proposed Bank Credit Facility is within the types of refinancing indebtedness allowed under these agreements.

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In February 2003, Moody’s Investors 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-. In addition, both rating agencies placed us on negative watch. In June 2003, Standard and Poor’s assigned a B- rating to our subordinated zero coupon notes due to Schlumberger. In July 2003, Moody’s Investors Service confirmed the credit ratings set forth above and assigned a B3 rating to our subordinated zero coupon notes due to Schlumberger. Both credit rating agencies retained our negative watch status. We are currently in the process of updating the credit rating agencies for our third quarter results and have requested them to confirm their ratings. We do not have any credit rating downgrade provisions in our debt agreements or the agreements governing our compression equipment lease obligations that would accelerate their maturity dates. 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.

On May 14, 2003, we entered into an agreement with Schlumberger to terminate our right to put our interest in the PIGAP II joint venture to Schlumberger. We had previously given notice of our intent to exercise the PIGAP II put in January 2003. We also agreed with Schlumberger to restructure the $150 million subordinated note that Schlumberger received from us in August 2001 as part of the purchase price for the acquisition of POC. As a result, we retained our ownership interest in PIGAP II.

A comparison of the primary financial terms of the original $150 million subordinated note and the restructured note are shown in the table below.

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%, 14.5% beginning March 1, 2004, 15.5% beginning March 1, 2005
Schlumberger First Call Rights on Hanover Equity Issuance:	None	Schlumberger had first call on any Hanover equity offering proceeds
Call Provision:	Hanover cannot call the Note prior to March 31, 2006	Callable at any time

As of March 31, 2003, the date from which the interest rate was adjusted, the $150 million subordinated note had an outstanding principal balance of approximately $171 million, including accrued interest. . Under the restructured terms, the maturity of the restructured note has been extended to March 31, 2007, from the original maturity of December 31, 2005. The note is a zero coupon note with original issue discount accreting at 11.0% for its remaining life, up to a total principal amount of $262.6 million payable at maturity. 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. 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 by Hanover until March 31, 2006. As agreed with Schlumberger, Hanover has agreed to bear the cost of and has filed a shelf registration statement with the SEC covering the resale of the restructured note by Schlumberger.

Also, on May 14, 2003, we agreed with Schlumberger Surenco, an affiliate of Schlumberger Technology Corporation, to the modification of the repayment terms of a $58 million obligation that was accrued as a contingent liability on our balance sheet

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since the acquisition of POC and was associated with the PIGAP II joint venture. The obligation was converted into a non recourse promissory note (“PIGAP Note”) payable by Hanover Cayman Limited, our indirect wholly-owned consolidated subsidiary, with a 6% interest rate compounding semi-annually until maturity in December 2053. In October 2003, the PIGAP II joint venture closed on the projects’ financing and distributed approximately $78.5 million to Hanover, of which approximately $59 million was used to payoff the PIGAP Note.

In June 2003, we filed a shelf registration statement with the SEC pursuant to which we may from time to time publicly offer equity, debt or other securities in an aggregate amount not to exceed $700 million. Once declared effective by the SEC and subject to market conditions, the shelf registration statement would be available to offer one or more series of debt or other securities, the proceeds of which could be used to refinance a portion of our compression equipment lease obligations and/or borrowings under our bank credit facility. We cannot be sure that we will be able to complete such offerings of debt or other securities.

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 accompanying balance sheet. The possibility of our 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. Since December 31, 2002, there have been no significant changes to our obligations to make future payments under existing contracts other than the renegotiated amounts payable to Schlumberger and Schlumberger Surenco discussed above.

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 engage in derivative financial instruments for trading or other speculative purposes. The cash flow from hedges is classified in the accompanying 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 with notional amounts of $75 million and $125 million and strike rates of 5.51% and 5.56%, respectively. These swaps were to expire in July 2001; however, they were extended for an additional two years at the option of the counterparty and expired in July 2003. The difference paid or received on the swap transactions was recorded as an accrued liability and recognized in leasing expense in all periods before July 1, 2003, and in interest expense thereafter. Because management decided not to designate the interest rate swaps as hedges at the time they were extended by the counterparty, we recognized an unrealized gain of approximately $4.1 million and $1.5 million, respectively, related to the change in the fair value of these interest rate swaps in lease expense in our statement of operations during the nine months ended September 30, 2003 and 2002 and recognized an unrealized gain of approximately $0.5 million in interest expense during the three months ended September 30, 2003. Prior to July 1, 2003, these amounts, which were reported as “Change in fair value of derivative financial instruments” in our Consolidated Statement of Operations and have been reclassified as “Interest expense” and “Lease expense” in the attached Condensed Consolidated Statement of Operations. The fair value of these interest rate swaps fluctuated with changes in interest rates over their terms and the fluctuations were 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 nine months ended September 30,

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2003 and 2002, we recorded income of approximately $4.3 million and a loss of $13.6 million, respectively, related to these three swaps, ($2.8 million and $8.8 million, net of tax) in other comprehensive income. As of September 30, 2003, a total of approximately $0.5 million was recorded in current liabilities and approximately $1.5 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.

We have exposure to currency risks in Argentina and Venezuela. To mitigate that risk, the majority of our existing contracts provide that we receive payment in U.S. dollars rather than Argentine pesos and Venezuelan bolivars, thus reducing our exposure to fluctuations in the peso’s and the bolivar’s value.

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 were reached, a preliminary payment could be made based on a one dollar to one 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. 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 nine months of 2003. During the nine months ended September 30, 2002, we recorded an exchange loss of approximately $11.9 million for assets exposed to currency translation in Argentina. For the nine months ended September 30, 2003, our Argentine operations represented approximately 5% of our revenue and 9% 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, during the nine months ended September 30, 2002, we recorded an exchange loss of approximately $11.9 million and $1.9 million for assets exposed to currency translation in Argentina and Venezuela, respectively, and recorded a translation gain of approximately $0.5 million for all other countries. For the nine months ended September 30, 2003, our Venezuelan operations represented approximately 11% of our revenue and 18% of our gross margin. At September 30, 2003, we had approximately $25.0 million in accounts receivable related to our Venezuelan operations.

In December 2002, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production has dropped substantially. In addition, exchange controls have been put in place which put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an agreement between the Venezuelan government and its opponents. Although the accord does offer the prospect of stabilizing Venezuela’s economy, if another national strike is staged, talks of a settlement break down, exchange controls remain in place, or economic conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income. As a result of the disruption in our operations in Venezuela, during the fourth quarter of 2002, our international rental revenues decreased by approximately $2.7 million. In the nine months ended September 30, 2003, we recognized approximately $2.7 million of billings to Venezuelan customers that were not recognized in 2002 due to concerns about the ultimate receipt of those revenues. At September 30, 2003, we had approximately $25.0 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 became effective for Hanover on January 1, 2003. The adoption of this new standard did not have a material effect on our consolidated results of operations, cash flows or financial position.

In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). The Statement updates, clarifies and simplifies existing accounting

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pronouncements. Provisions of SFAS 145 related to the rescission of Statement 4 became 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 became effective for interim periods beginning after June 15, 2003. We have adopted the provisions of EITF 00-21, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The 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 that are included within these financial statements.

In January 2003, the FASB issued FIN 46. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved by means other than through voting rights (“variable interest entities” or “VIEs”) and the determination of when and which business enterprise should consolidate the VIE in its financial statements (the “primary beneficiary”). This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest or (ii) 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. On October 8, 2003, the FASB provided a deferral of the latest date by which all public companies must adopt FIN 46. The deferral provides that FIN 46 be applied, at the latest, to the first reporting period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. In addition, the deferral allowed companies to elect to adopt early the provisions of FIN 46 for some but not all of the variable interest they hold.

Prior to July 1, 2003, we entered into five lease transactions that were recorded as a sale and leaseback of the compression equipment and were treated as operating leases for financial reporting purposes. On July 1, 2003, we adopted the provisions of FIN 46 as they relate to the special purpose entities that lease compression equipment to us. As a result of the adoption, we added approximately $1,089 million in compressor equipment assets, $192.3 million of accumulated depreciation (including approximately $58.6 million of accumulated depreciation related to periods before the sale and leaseback of the equipment), $1,105.0 million in debt and $34.6 million in minority interest obligations to our balance sheet, and we reversed $108.8 million of deferred gains that were recorded on our balance sheet as a result of the sale leaseback transactions. On July 1, 2003, we recorded a $133.7 million charge ($86.9 million net of tax) to record the cumulative effect from the adoption of FIN 46 related to prior

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period depreciation of the compression equipment assets. Additionally, we estimate that, after adoption, we will record approximately $17 million per year in additional depreciation expense on our leased compression equipment as a result of the inclusion of the compression equipment on our balance sheet and will also record the payments made under our compression equipment leases as interest expense. As of September 30, 2003, the compression assets that are owned by the entities that lease equipment to us but are now included in property, plant and equipment in our consolidated financial statements had a net book value of approximately $983.3 million, including improvements made to these assets after the sale leaseback transactions.

We have a consolidated subsidiary trust that has Mandatorily Redeemable Preferred Securities outstanding which have a liquidation value of $86.3 million. These securities are reported on our balance sheet as Mandatorily Redeemable Convertible Preferred Securities. The trust may be a VIE under FIN 46 because we only have a limited ability to make decisions about its activities and we may not be the primary beneficiary of the trust. If the trust is a VIE under FIN 46, the trust and the Mandatorily Redeemable Preferred Securities issued by the trust may no longer be reported on our balance sheet. Instead, we would report our subordinated notes payable to the trust as a liability. These intercompany notes have previously been eliminated in our consolidated financial statements. The above-described changes on our balance sheet and statements of operations would be reclassifications. Because we are still evaluating whether we will be required to make these reclassifications and other potential changes in connection with our adoption of FIN 46, if any, we have not adopted the provisions of FIN 46 other than for the entities that lease compression equipment to us, as discussed above.

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 have adopted the provisions SFAS 149, which did not have a material effect on our consolidated results of operations, cash flow or financial position.

In May 2003, the FASB 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 for interim periods beginning after June 15, 2004. On November 7, the FASB issued Staff Position 150-4 that delayed the effective date for certain types of financial instruments. We do not believe the adoption of the guidance currently provided in SFAS 150 will have a material effect on our consolidated results of operations or cash flow. However, we may be required to classify as debt approximately $34.6 million in sale leaseback obligations that are currently reported as “Minority interest” on our Condensed Consolidated Balance Sheet pursuant to FIN 46 (see Note 6). These Minority interest obligations represent the equity of the entities that lease compression equipment to us. In accordance with the provisions of our compression equipment lease obligations, the equity certificate holders are entitled to quarterly or semi-annual yield payments on the aggregate outstanding equity certificates. As of September 30, 2003, the yield rates on the outstanding equity certificates ranged from 4.4% to 9.5%. Equity certificate holders may receive a return of capital payment upon lease termination or our purchase of the leased compression equipment after full payment of all debt obligations of the entities that lease compression equipment to us. At September 30, 2003, the carrying value of the minority interest obligations approximated the fair market value of assets that would be required to be transferred to redeem the minority interest obligations.

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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 our exposure to fluctuations in interest rates. At September 30, 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 $18.7 million, of which $12.2 million was recorded in accrued liabilities and $6.5 million in other long-term liabilities. At September 30, 2003 we were party to three interest rate swaps to convert variable lease payments under certain lease arrangements to fixed payments as follows (dollars in thousands):

Maturity Date	Company Pays Fixed Rate		Notional Amount		Fair Value of the Swap at September 30, 2003
3/11/2005	5.2550	%	$	100,000	$	(5,590	)
3/11/2005	5.2725	%	$	100,000	$	(5,615	)
10/26/2005	5.3975	%	$	100,000	$	(7,479	)

At September 30, 2003, we were 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 $0.9 million.

We are also exposed to interest rate risk on borrowings under our floating rate bank credit facility. At September 30, 2003, $172 million was outstanding bearing interest at a weighted average effective rate of 3.4% per annum. Assuming a hypothetical 10% increase in the weighted average interest rate from those in effect at September 30, 2003, the increase in annual interest expense for advances under this facility would be approximately $0.6 million.

On October 23, 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 the market value of our stock when settlement is approved by the court and potential changes in the market conditions affecting the valuation of the note to be issued. Additionally, the settlement is contingent on court approval and certain other conditions. Accordingly, we will revalue our estimate of the settlement on a quarterly basis until the settlement is approved by the court. We are exposed to market risk on the value of our common stock to be issued by us. For every $1 change in market value of a share of our common stock, we will record a $2.5 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 our 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 in Argentina and Venezuela; 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 were reached, a preliminary payment could be made based on a one dollar to one 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 nine months 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 nine months ended September 30, 2003, our Argentine operations represented approximately 5% of our revenue and 9% 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 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.

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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 nine months ended September 30, 2003, our Venezuelan operations represented approximately 11% of our revenue and 18% 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, opponents of Venezuelan President Hugo Chávez initiated a country-wide strike by workers of the national oil company in Venezuela. This strike, a two-month walkout, had a significant negative impact on Venezuela’s economy and temporarily shut down a substantial portion of Venezuela’s oil industry. As a result of the strike, Venezuela’s oil production has dropped substantially. In addition, exchange controls have been put in place that put limitations on the amount of Venezuelan currency that can be exchanged for foreign currency by businesses operating inside Venezuela. In May 2003, after six months of negotiation, the Organization of the American States brokered an agreement between the Venezuelan government and its opponents. Although the accord does offer the prospect of stabilizing Venezuela’s economy, if another national strike is staged, talks of a settlement break down, exchange controls remain in place, or economic conditions in Venezuela continue to deteriorate, our results of operations in Venezuela could be materially and adversely affected, which could result in reductions in our net income. As a result of the disruption in our operations in Venezuela, during the fourth quarter of 2002, our international rental revenues decreased by approximately $2.7 million. In the nine months ended September 30, 2003, we recognized approximately $2.7 million of billings to Venezuelan customers that were not recognized in 2002 due to concerns about the ultimate receipt of those revenues. At September 30, 2003, we had approximately $25.0 million in accounts receivable related to our Venezuelan operations.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. As of September 30, 2003, Hanover’s principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) 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 required by Rule 13a-15(d) of the Securities Exchange Act of 1934.

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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 (together with subsequently filed 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 September 5, 2003, lead plaintiffs filed an amended complaint in which they continued to seek relief under Sections 10(b) and 20(a) of the Securities Exchange Act against Hanover, certain former officers and directors and our auditor, PricewaterhouseCoopers LLP, on behalf of themselves and the class of persons who purchased Hanover securities between May 4, 1999 and December 23, 2002.

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 lawsuits in the United States District Court for the Southern District of Texas were consolidated on August 19 and August 26, 2002 into the Harbor Finance Partners derivative lawsuit. With that consolidation, the pending derivative lawsuits were:

Plaintiff	Defendants	Civil Action No.	Court	Date Instituted
Harbor Finance Partners, Derivatively on behalf of Hanover Compressor Company	Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Robert R. Furgason, Melvyn N. Klein, Michael A. O’Connor, and Alvin V. Shoemaker, Defendants and Hanover Compressor Company, Nominal Defendant	H-02-0761	United States District Court for the Southern District of Texas	03/01/02
Coffelt Family, LLC, derivatively on behalf of Hanover Compressor Company	Michael A. O’Connor, Michael J. McGhan, William S. Goldberg, Ted Collins, Jr., Melvyn N. Klein, Alvin V. Shoemaker, and Robert R. Furgason, Defendants and Hanover Compressor Company, Nominal Defendant	19410-NC	Court of Chancery for the State of Delaware State Court in New Castle County	02/15/02

On October 2, 2003, the Harbor Finance Partners derivative lawsuit was consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust securities class action.

On and after March 26, 2003, three plaintiffs filed separate putative class actions against Hanover, certain named individuals and other purportedly unknown defendants, in the United States District Court for the Southern District of Texas. The

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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 August 1, 2003, the three ERISA class actions were consolidated into the Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust federal securities class action. On October 9, 2003, a consolidated amended complaint was filed by the plaintiffs in the ERISA class action against Hanover, Michael McGhan, Michael O’Connor and William Goldberg, which included the same allegations as indicated above, and was filed on behalf of themselves and a class of persons who purchased or held Hanover securities in their 401(k) Plan between May 4, 1999 and December 23, 2002.

On October 23, 2003, we entered into a Stipulation of Settlement, which, subject to court approval, will settle the claims underlying the securities class actions, the ERISA class actions and the shareholder derivative actions described above. The terms of the proposed settlement provide for us to: (i) make a cash payment of approximately $30 million (of which $26.7 million was funded by payments from Hanover’s directors and officers insurance carriers), (ii) issue 2.5 million shares of our 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 our common stock trades at or above the average price of $12.25 per share for 15 consecutive days at any time between March 31, 2004 and March 31, 2007. As part of the settlement, we have also agreed to implement corporate governance enhancements, including allowing large shareholders to participate in the process to appoint two independent directors to our Board. Our independent auditor, PricewaterhouseCoopers LLP, 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 Hanover common stock from their holdings or from other sources.

In connection with this settlement, we initially recorded a pre-tax charge of approximately $68.7 million ($54.0 million after tax) in our first quarter 2003 financial statements. This charge included approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note. The charge also included approximately $26.6 million, without tax benefit, for 2.5 million Hanover common shares to be funded by GKH. Because this settlement could be considered to be a related party transaction as defined in SEC Staff Accounting Bulletin 5-T, the fair value of the Hanover common shares to be paid by GKH was recorded as an expense in Hanover’s statement of operations.

As discussed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2003, we planned to seek guidance from the Office of the Chief Accountant of the SEC to determine whether the Hanover common shares provided by GKH should be recorded as an expense by us. After the submission of a detailed letter and discussions with the SEC Staff, the Staff informed us that it would not object to GKH’s portion of the settlement not being considered a related party transaction as defined in SEC Staff Accounting Bulletin 5-T. Accordingly, the $26.6 million charge related to the 2.5 million Hanover common shares being paid by GKH could be reversed from our first quarter 2003 financial statements.

On August 5, 2003, we filed an amendment to our Quarterly Report on Form 10-Q for the three months ended March 31, 2003 to amend our first quarter 2003 financial statements to exclude the $26.6 million charge related to the 2.5 million Hanover common shares being funded by GKH. As a result, in our first quarter 2003 financial statements, as amended, we recorded a pre-tax charge of approximately $42.1 million ($27.4 million after tax), net of insurance recoveries, for our contribution of cash and estimated costs, 2.5 million Hanover common shares, and the contingent note.

In addition, in the second quarter of 2003, we adjusted our estimate of the settlement and recorded an additional $1.7 million charge due to the change in the value from May 14 to June 30, 2003 of the 2.5 million Hanover common shares contributed by us in connection with the settlement. In the third quarter of 2003, we recorded a reduction in the charge of $3.5 million to adjust our estimate of the settlement due to additional change in the value of such stock since June 30, 2003.

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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):

	Amended First Quarter Estimated Settlement			Second & Third Quarter Adjustment To Estimated 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			(1,850	)		24,750
Legal fees and administrative costs		6,929			—			6,929
Total		68,773			(1,850	)		66,923
Less insurance recoveries		(26,670	)		—			(26,670	)
Net estimated litigation settlement	$	42,103		$	(1,850	)	$	40,253

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 to us 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 our common stock trades at or above the average price of $12.25 per share 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.

As of September 30, 2003, our accompanying balance sheet includes a $30.2 million long-term liability pending approval by the courts and satisfaction of certain other conditions and $34.6 million in accrued liabilities related to amounts which are expected to be paid in the next twelve months. During the second quarter, the $26.7 million receivable from the insurance carriers and $2.8 million of our portion of the cash settlement was paid into an escrow fund and is included in the accompanying balance sheet as restricted cash. Upon approval of the settlement by the court, 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 final value of the settlement may differ significantly from the estimates currently recorded depending on the market value of our common stock when approved by the court and potential changes in the market conditions affecting the valuation of the note to be issued. Additionally, the settlement is contingent on court approval and certain other conditions. Accordingly, we will revalue our estimate of the cost of the settlement on a quarterly basis until the settlement is approved by the court.

On July 18, 2003, the parties entered into an Amended Memorandum of Understanding which did not alter the aggregate amount to be paid under the settlement described above, but in which the counsel for the named plaintiffs in the Angleopoulos and the Freeman ERISA class actions agreed to become parties to the settlement. As partial consideration therefore, it was agreed that an additional $0.8 million (for a total of $1.8 million) from the settlement fund that was previously designated for relief for the securities class actions would be reallocated to provide relief in connection with the ERISA class actions. On October 13, 2003, the parties entered into a Second Amended and Restated Memorandum of Understanding that included an additional $225,000 contribution to the settlement (to be funded equally by Hanover and GKH) and by which counsel in the Harbor Finance derivative action became a party to the settlement. As part of this arrangement, Hanover agreed to certain additional governance procedures including certain enhancements to its code of conduct.

On October 23, 2003, the parties to the Second Amended and Restated Memorandum of Understanding entered into a Stipulation of Settlement which, subject to court approval, will fully and finally resolve all of the securities class actions, ERISA class actions and shareholder derivative actions filed against Hanover and certain other individuals. PricewaterhouseCoopers LLP is not a party to the Stipulation of Settlement and will remain a defendant in the federal securities class action. On October 24, 2003, the parties moved the court for preliminary approval of the proposed settlement and sought permission to provide notice to the potentially affected persons and to set a date for a final hearing to approve the proposed settlement. The settlement, therefore, remains subject to court approval and could be the subject of an objection by potentially affected persons.

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On November 14, 2002, the SEC issued a Formal Order of Private Investigation relating to the matters involved in the restatements of our financial statements. We have cooperated fully with the Fort Worth District Office Staff of the SEC and anticipate reaching a resolution of the SEC Staff’s investigation in a manner which is generally consistent with resolutions reached in similar situations. The Company understands that any resolution reached with the Staff of the Fort Worth District Office of the SEC has no legal effect until it is reviewed and, if appropriate, approved by the SEC. As such, the Company does not anticipate announcing any resolution of the SEC Staff’s investigation unless and until such resolution is approved by the SEC. While the Company does not currently anticipate that any resolution reached with the SEC would have a material adverse impact on the business, consolidated financial condition, results of operations or cash flows of the Company, there can be no assurances in this regard at this time.

As of September 30, 2003, we had incurred approximately $14.0 million in legal related expenses in connection with the internal investigations, the putative class action securities lawsuits, the derivative lawsuit and the SEC investigation. Of this amount, we advanced approximately $2.2 million on behalf of current and former officers and directors in connection with the above-named proceedings. We intend to advance 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 $4.4 million in additional legal fees and administrative expenses in connection with the settlement of the securities-related litigation, the SEC investigation and advances on behalf of current and former officers and directors for legal fees.

On June 25, 1999, we notified the Air Quality Bureau of the Environmental Protection Division, New Mexico Environment Department of potential violations of regulatory and permitting requirements. The violations included failure to conduct required performance tests, failure to file required notices and failure to pay fees for compressor units located on sites for more than one year. We promptly paid the required fees and corrected the violations. On June 12, 2001, after the violations had been corrected, the Director of the Division issued a compliance order to us in connection with the alleged violations. The compliance order assessed a civil penalty of $15,000 per day per regulatory violation and permit; no total penalty amount was proposed in the compliance order. On October 3, 2003, the Division notified us that the total proposed penalty would be $759,072. However, since the alleged violations had been self-disclosed, that amount was reduced to $189,768. We expect to respond to the penalty assessment, challenging some of the calculations, and will propose an alternative settlement amount, which we expect to be less than $100,000.

In the ordinary course of business we are 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 REPORTS ON FORM 8-K

(a) Exhibits

10.1	Stipulation And Agreement Of Settlement
10.2	Second Amended and Restated Memorandum of Understanding
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	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)
32.2	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)

48

(b) Reports submitted on Form 8-K:

1. A report on Form 8-K was filed on July 13, 2003, which reported under the caption “Item 5— Other Events and Required FD Disclosure” the death of Michael O’Connor, Hanover’s director and chairman emeritus of the company. A copy of the press release was attached as Exhibit 99.1 under caption “Item 7(c)—Exhibits.” Also reported under the caption “Item 5— Other Events and Required FD Disclosure” was the announcement that Hanover entered into an Amended Memorandum of Understanding related to its securities litigation settlement. A copy of the Amended Memorandum of Understanding was attached as Exhibit 10.1 under the caption “Item 7(c)—Exhibits.” The date of such report (the date of the earliest event reported) was July 18, 2003.

2. A report on Form 8-K was filed on July 30, 2003, which reported under caption “Item 9—Regulation FD Disclosure (Information furnished under Item 12 – Results of Operations and Financial Condition)” Hanover’s financial results for the fiscal quarter ended June 30, 2003. A copy of the press release was attached as Exhibit 99.1 under the caption “Item 7(c)—Exhibits.” The date of such report (the date of the earliest event reported) was July 30, 2003.

49

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: November 13, 2003
By:	/S/    CHAD C. DEATON
	Chad C. Deaton
	President and Chief Executive Officer

Date: November 13, 2003
By:	/S/ JOHN E. JACKSON
	John E. Jackson
	Senior Vice President and Chief Financial Officer

50

EXHIBIT INDEX

10.1	Stipulation And Agreement Of Settlement
10.2	Second Amended and Restated Memorandum of Understanding
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	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)
32.2	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)

51

EX-10.1

                                                                    EXHIBIT 10.1

                          UNITED STATES DISTRICT COURT
                           SOUTHERN DISTRICT OF TEXAS
                                HOUSTON DIVISION

PIRELLI ARMSTRONG TIRE                          |    Civil Action No.
CORPORATION RETIREE MEDICAL                     |    H-02-0410
BENEFITS TRUST, et al., On Behalf of            |    (Consolidated)
Themselves and All Others Similarly Situated,   |    Hon. Vanessa D. Gilmore
                                                |
                             Plaintiffs,        |    CLASS ACTION
                                                |
     vs.                                        |
                                                |
HANOVER COMPRESSOR COMPANY, et al.              |
                                                |
                                                |
                             Defendants.        |
                                                |
- -------------------------------------------------

                     STIPULATION AND AGREEMENT OF SETTLEMENT

        This Stipulation and Agreement of Settlement dated as of October 23,
2003, (this "Stipulation") is made and entered into by and among the Settling
Parties, by and through their counsel of record in the Settling Actions. This
Stipulation is intended by the Settling Parties to fully, finally and forever
resolve, discharge and settle the Released Claims on and subject to the terms
and conditions set forth herein. All capitalized terms shall have the meanings
given to such terms in Section 1 below.

                                    RECITALS

        WHEREAS, on or after February 4, 2002, putative securities class action
lawsuits were filed by the plaintiffs named below on behalf of themselves and
all others similarly situated in the United States District Court for the
Southern District of Texas (the "Federal Court"), entitled



Pirelli Armstrong Tire Corp. Retiree Medical Benefits Trust, et al. v. Hanover
Compressor Co., et al., Case No. H-02-0410, McBride v. Hanover Compressor Co.,
Case No. H02-0431, Koch v. Hanover Compressor Co., Case No. H-02-0441, Schneider
v. Hanover Compressor Co., Case No. H-02-0491, Goldstein v. Hanover Compressor
Co., Case No. H-02-0526, Noyes v. Hanover Compressor Co., No. H-02-0574, Rocha
v. Hanover Compressor Co., Case No. 02-0594, Peck v. Hanover Compressor Co.,
Case No. H-02-0627, Mueller v. Hanover Compressor Co., Case No. H-02-0652,
Langhoff v. Hanover Compressor Co., Case No. H-02-0764, Fox v. Hanover
Compressor Co., Case No. H-02-0815, Rosen v. Goldberg, Case No. H-02-0959,
Detectives Endowment v. Hanover Compressor Co., Case No. H-02-1016, Montag v.
Hanover Compressor Co., Case No. H-02-1030 and Anderson v. Hanover Compressor
Co., Case No. H-02-2306 (collectively, the "Securities Actions" were filed by
the "Securities Plaintiff Class");

        WHEREAS, by Order dated March 28, 2002, the Federal Court consolidated
the Securities Actions under the caption Pirelli Armstrong Tire Corp. Retiree
Medical Benefits Trust, et al. v. Hanover Compressor Co., et al. (the
"Consolidated Securities Action");

        WHEREAS, by Order dated January 6, 2003, the Federal Court appointed
Pirelli Armstrong Tire, Retiree Medical Benefits Trust, Plumbers & Steamfitters,
Local 137 Pension Fund, O. Bryant Lewis, 720 Capital Management, LLC and
Specialists DPM as lead plaintiffs (the "Lead Plaintiffs") and appointed Milberg
Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss") as lead counsel (the "Lead
Counsel") in the Consolidated Securities Action;

        WHEREAS, on and after April 10, 2002, the following derivative actions
were filed in or removed to the Federal Court: Koch v. O'Connor, et al., Case
No. H-02-1332, Carranza v. O'Connor, et al., Case No. H-02-1430, Steves v.
O'Connor, et al., Case No. H-02-1527, Hensley v. McGann, et al., Case No.
H-02-2994, Harbor Finance Partners v. McGhan, et al., Case No.

                                        2



H-02-0761, (the "Federal Derivative Actions") and on February 15, 2002, an
additional derivative action was filed in the Delaware Chancery Court: Coffelt
Family, LLC v. O'Connor (the "State Derivative Action"), et al., No. CA 19410
(collectively, the "Derivative Actions" and the plaintiffs in the Derivative
Actions are the "Settling Derivative Plaintiffs");

        WHEREAS, on August 19, 2002 and August 26, 2002, the Federal Derivative
Actions were consolidated into the Harbor Finance Partners action (the
"Consolidated Derivative Action");

        WHEREAS, on January 23, 2003, Lead Plaintiff entered into tolling
agreements with each of GKH Investments, L.P., GKH Partners, L.P., Joe C.
Bradford, Curtis Bedrich, Goldman, Sachs & Co., Michael A. O'Connor, William S.
Goldberg, Charles D. Erwin, Ted Collins, Jr., Robert R. Furgason, Rene J. Huck,
Melvyn N. Klein, Alvin V. Shoemaker and Victor Grijalva, pursuant to which the
statute of limitations was tolled with respect to certain claims (the "Tolling
Agreements");

        WHEREAS, on or after March 26, 2003, putative class actions alleging
violations of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") were filed in the Federal Court by or on behalf of the plaintiffs on
behalf of themselves and all others similarly situated (the "ERISA Plaintiffs"):
Kirkley v. Hanover Co., et al., Case No. H-03-1155, Angleopoulos v. Hanover
Compressor Co., et al., Case No. H-03-1064 and Freeman v. Hanover Compressor
Co., et al., Case No. H-3-1095 (collectively, the "ERISA Actions");

        WHEREAS, certain of the Settling Parties, through their respective
counsel, entered into a memorandum of understanding, dated May 12, 2003;

        WHEREAS, certain Settling Parties, including the plaintiffs in the
Angleopoulos and Freeman actions, who were not parties to the memorandum of
understanding that was entered

                                        3



into on May 12, 2003, through their counsel, entered into a first amended
memorandum of understanding dated July 18, 2003;

        WHEREAS, Michael O'Connor passed away on July 23, 2003 and Karen L.
O'Connor has been appointed as the Independent Executrix of his Estate in Case
No. 41710-2 in the County Court at Law No. 2 of Nueces County, Texas;

        WHEREAS, by Order dated August 1, 2003, the Federal Court consolidated
the ERISA Actions into the Consolidated Securities Action for purposes of
settlement;

        WHEREAS, the Settling Parties, including the plaintiff in the Harbor
Finance Partners action (the only Settling Plaintiff who did not enter into the
July 18, 2003 first amended memorandum of understanding) entered into a Second
Amended and Restated Memorandum of Understanding, dated October 13, 2003 (the
"MOU");

        WHEREAS, on September 5, 2003, Lead Plaintiffs, on behalf of themselves
and all others similarly situated, filed an Amended Complaint against PwC,
Hanover, Michael McGhan, William S. Goldberg and Michael A. O'Connor (the
"Consolidated Federal Securities Complaint");

        WHEREAS, by Order dated October 2, 2003 the Federal Court consolidated
the Consolidated Derivative Actions into the Consolidated Securities Action;

         WHEREAS, on October 9, 2003 the ERISA Plaintiffs filed an Amended
Consolidated Complaint for Breach of Fiduciary Duty and Violation of ERISA
Disclosure Requirements in the Federal Court;

         WHEREAS, Settling Plaintiffs, through their respective counsel, have
conducted and completed extensive research, discovery and investigation during
the prosecution of the Settling Actions, including without limitation: (1)
inspection and analysis of tens of thousands of pages

                                        4



of documents produced by Settling Defendants; (2) review of Hanover's public
filings, press releases and other public statements; (3) interviews of numerous
Hanover officers and employees; and (4) consultation with accounting and damages
consultants;

        WHEREAS, Settling Parties have engaged in substantial arm's length
negotiations in an effort to resolve all claims that have been or could be
asserted in the Settling Actions, including conducting numerous meetings and
telephone conferences where the terms of the agreements detailed herein were
extensively debated and negotiated;

        WHEREAS, Settling Plaintiffs, through their respective counsel, have
carefully considered and evaluated, inter alia, the relevant legal authorities
and evidence to support the claims asserted against the Settling Defendants, the
likelihood of prevailing on those claims, the Settling Defendants' respective
abilities to pay any judgment obtained in light of their current financial
condition, and the likely appeals and subsequent proceedings necessary if the
Settling Plaintiffs did prevail against the Settling Defendants, and have
concluded that the Settlement set forth herein is in the best interests of the
Settling Plaintiffs;

        WHEREAS, the Settling Defendants have denied and continue to deny that
they have liability as a result of any and all allegations contained in the
Settling Actions, and are entering into the Settlement in order to eliminate the
burden, distractions, expense and uncertainty of further litigation;

        WHEREAS, the Settling Parties and their counsel believe that the terms
and conditions contained in this Stipulation are fair, reasonable and adequate;
and

        WHEREAS, the Settling Parties and their counsel agree that these
Recitals are an integral part of this Stipulation and constitute binding
representations by the applicable Settling Parties and their counsel.

                                        5



        NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among the
Settling Parties that, subject to Federal Court approval and the satisfaction of
the conditions of Settlement as set forth herein, each of the Released Claims
shall be finally and fully compromised, settled and released, and each of the
Settling Actions shall be dismissed with prejudice, as to all Settling Parties,
upon and subject to the terms and conditions of this Stipulation, as follows:

1.      DEFINITIONS

        As used in the Stipulation the following terms have the meanings
specified below:

                1.1.    "Actions" means the Consolidated Securities Action, the
        Derivative Actions and the ERISA Actions.

                1.2.    "Authorized Claimants" means the Authorized ERISA
        Claimants and the Authorized Securities Claimants.

                1.3.    "Authorized ERISA Claimant" means any member of the
        ERISA Plaintiff Class, or such Class Member's successor in interest, who
        files or on whose behalf is filed a timely, valid Proof of Claim and
        whose claim for recovery is allowed pursuant to the terms of the ERISA
        Settlement.

                1.4.    "Authorized Securities Claimant" means any member of the
        Securities Plaintiff Class who files or on whose behalf is filed a
        timely, valid Proof of Claim and whose claim for recovery is allowed
        pursuant to the terms of the Securities Settlement.

                1.5.    "Change of Control" means the (i) sale, lease or
        exchange of all or substantially all of Hanover's assets to any Person
        (other than a Person wholly owned, directly or indirectly, by Hanover),
        (ii) consummation of a merger, consolidation, recapitalization,
        reorganization or other similar transaction involving Hanover, other
        than

                                        6



        one in which more than 50% of the total voting power of the surviving
        entity outstanding immediately after such transaction is beneficially
        owned by the holders of the outstanding voting securities of Hanover
        immediately prior to such transaction, with the voting power of each
        such continuing holder relative to all such continuing holders not
        substantially altered in the transaction, (iii) dissolution or
        liquidation of Hanover, or (iv) the acquisition or gain by any Person,
        including a "group" as contemplated by Section 13(d)(3) of the Exchange
        Act, of ownership or control (including, without limitation, power to
        vote) of more than 50% of the outstanding shares of Hanover's voting
        stock (based upon voting power).

                1.6.    "Claims Administrator" means the firm of Gilardi &
        Company.

                1.7.    "Class Period" means the period beginning on May 4, 1999
        and ending on December 23, 2002 (inclusive).

                1.8.    "Code" means the Internal Revenue Code of 1986, as
        amended.

                1.9.    "Consolidated Derivative Action" has the meaning
        assigned to such term in the Recitals hereof.

                1.10.   "Consolidated Federal Securities Complaint" has the
        meaning assigned to such term in the Recitals hereof.

                1.11.   "Consolidated Securities Action" has the meaning
        assigned to such term in the Recitals hereof.

                1.12.   "Derivative Actions" has the meaning assigned to such
        term in the Recitals hereof.

                1.13.   "Derivative Releases" has the meaning assigned to such
        term in Section 3.9.

                                        7



                1.14.   "Derivative Settlement" means the settlement of the
        Derivative Actions on and subject to the terms and conditions set forth
        in this Stipulation.

                1.15.   "Derivative Settlement Fund" means the payments from the
        Securities Settlement Cash Fund and the Securities Settlement Stock Fund
        that are contemplated by Section 3.6.

                1.16.   "Effective Date" means, with respect to each Settling
        Action, the date of completion of the following: (i) entry of an Order
        and Final Judgment, which approves in all material respects (x) the
        dismissal of the claims that have been or could be asserted in such
        Settling Action and (y) the releases and bar orders provided for in the
        Stipulation with respect to such Settling Action, and (ii) either (x)
        expiration of the time to appeal or otherwise seek review of the Order
        and Final Judgment which approves, in all material respects, the
        settlement of such Settling Action as provided herein, without any
        appeal having been taken or review sought, or (y) if an appeal is taken
        or review sought, the expiration of five (5) days after an appeal or
        review shall have been dismissed or finally determined by the highest
        court before which appeal or review is sought and which affirms the
        material terms of such appealed settlement and/or an Order and Final
        Judgment and is not subject to further judicial review: provided,
        however, that any award of attorneys' fees or costs shall not be
        considered a material provision of the Order and Final Judgment and any
        appeal of any such award shall not delay the Effective Date and any
        modification as a result of such appeal shall not be considered a
        modification of a material term.

                1.17.   "ERISA" has the meaning assigned to such term in the
        Recitals hereof.

                                        8



                1.18.   "ERISA Actions" has the meaning assigned to such term in
        the Recitals hereof.

                1.19.   "ERISA Plaintiff Class" means each and every Person who
        was a participant in the Plan and who, at any time during the Class
        Period, purchased and/or held Hanover Securities in their accounts in
        the Plan, and all Persons who hold or held Securities in the Plan as
        beneficiaries of any such participants.

                1.20.   "ERISA Plaintiffs" has the meaning assigned to such term
        in the Recitals hereof.

                1.21.   "ERISA Plan of Allocation" means the terms and
        procedures for allocating the ERISA Settlement Fund among, and
        distributing it to Authorized ERISA Claimants as set forth in the
        Notice, or as otherwise approved by the Federal Court.

                1.22.   "ERISA Releases" has the meaning assigned to such term
        in Section 4.9.

                1.23.   "ERISA Settlement" means the settlement of the ERISA
        Actions on and subject to the terms and conditions set forth in this
        Stipulation.

                1.24.   "ERISA Settlement Fund" has the meaning assigned to such
        term in Section 4.2.

                1.25.   "Escrow Agent" means Milberg Weiss, in its capacity as
        escrow agent with respect to the Settlement Fund.

                1.26.   "Escrow Fund" means the escrow funds on deposit with
        Milberg Weiss, as escrow agent pursuant to the Escrow Agreement dated
        May 29, 2003, between Milberg Weiss, as escrow agent, and Hanover.

                1.27.   "Exchange Act" means the Securities Exchange Act of
        1934, as amended.

                                        9



                1.28.   "Federal Court" has the meaning assigned to such term in
        the Recitals hereof.

                1.29.   "Federal Derivative Actions" has the meaning assigned to
        such term in the Recitals hereof.

                1.30.   "FED. R. CIV. P. 23" means Federal Rule of Civil
        Procedure 23.

                1.31.   "Fee and Expense Award" means the fees and expenses
        awarded to Lead Counsel and Settling ERISA Plaintiffs' Counsel and, to
        the extent approved by the Federal Court, the feeagreed to be paid to
        the Settling Derivative Plaintiffs' Counsel as set forth in sections 3.6
        and 3.7 hereof.

                1.32.   "Final" means no longer subject to further appeal or
        review, whether by exhaustion of any possible appeal, lapse of time or
        otherwise.

                1.33.   "GKH" means GKH Partners, L.P., GKH Investments, L.P.,
        GKH Private Limited, HGW Associates, L.P., DWL Lumber Corp. and JAKK
        Holding Corp.

                1.34.   "GKH Settlement Shares" means two million five hundred
        thousand (2,500,000) shares of Hanover Common Stock to be paid to the
        Settlement Fund by GKH Partners, L.P. and GKH Investments, L.P., as
        provided in Sections 2.2 and 2.7.

                1.35.   "Governance Term Sheet" means the Corporate Governance
        Settlement Term Sheet, attached hereto as Exhibit A.

                1.36.   "Hanover" means Hanover Compressor Company, a Delaware
        corporation.

                1.37.   "Hanover Common Stock" means the common stock, par value
        $.001 per share, of Hanover.

                                       10



                1.38.   "Hanover Securities" means Hanover Common Stock and any
        other Hanover equity or debt security or option related to the forgoing.

                1.39.   "Hanover Settlement Shares" means two million five
        hundred thousand (2,500,000) shares of Hanover Common Stock, which may
        be newly issued shares, other than and in addition to the GKH Settlement
        Shares, to be paid by Hanover to the Settlement Fund as provided in
        Section 2.7.

                1.40.   "Hanover Shareholders" means all record owners of
        Hanover Common Stock as of May 12, 2003.

                1.41.   "Lead Counsel" has the meaning assigned to such term in
        the Recitals hereof.

                1.42.   "Lead Plaintiffs" has the meaning assigned to such term
        in the Recitals hereof.

                1.43.   "Letter Agreement" means that certain letter agreement,
        dated May 12, 2003, by and between Hanover and GKH and certain of its
        Related Persons, which sets forth certain agreements relating to the
        settlement of the Actions.

                1.44.   "Michael A. O'Connor" means Michael A. O'Connor and his
        heirs, assigns, legatees, and devisees, the Estate of Michael A.
        O'Connor, Deceased, and Karen L. O'Connor as the Independent Executrix
        of the Estate of Michael A. O'Connor, Deceased.

                1.45.   "Milberg Weiss" has the meaning assigned to such term in
        the Recitals hereof.

                1.46.   "MOU" has the meaning assigned to such term in the
        Recitals hereof.

                                       11



                1.47.   "Non-Settled Action" has the meaning assigned to such
        term in Section 10.3.

                1.48.   "Note" means the unsecured promissory note, in
        substantially the form attached hereto as Exhibit B, to be contributed
        to the Settlement Fund by Hanover pursuant to Section 2.7.

                1.49.   "Notice" means any or all of the notices concerning the
        Settlement Hearings, in substantially the forms of the individual
        notices attached hereto as Exhibits C, D, and E and the summary notices
        attached hereto as Exhibits F, G and H.

                1.50.   "Order and Final Judgment" means an order and final
        judgment in substantially the forms attached hereto as Exhibits I, J,
        and K.

                1.51.   "Person" means a natural person, individual,
        corporation, partnership, limited partnership, limited liability
        partnership, limited liability company, association, joint venture,
        joint stock company, estate, legal representative, trust, unincorporated
        association, government or any political subdivision or agency thereof,
        any business or legal entity, and any spouse, heir, legatee, executor,
        administrator, predecessor, successor, representative or assign of any
        of the foregoing.

                1.52.   "Plan" means the Hanover Companies Retirement Savings
        Plan.

                1.53.   "Preliminary Order" has the meaning assigned to such
        term in Section 8.1, in substantially the forms attached hereto as
        Exhibits L, M and N.

                1.54.   "Proof of Claim" means the Proof of Claim and Substitute
        Form W-9, in substantially the form attached hereto as Exhibit O, which
        will be mailed to the Securities Plaintiff Class together with the
        Notice.

                1.55.   "PwC" means PricewaterhouseCoopers LLP.

                                       12



                1.56.   "Related Persons" means, with respect to any Person,
        such Person's present and former parent entities, subsidiaries (direct
        or indirect) and affiliates, and each of their respective present and
        former shareholders, general partners, limited partners, affiliates,
        divisions, joint ventures, partnerships, officers, directors, employees,
        agents, representatives, attorneys, insurers, excess insurers, experts,
        advisors, investment advisors, underwriters, fiduciaries, trustees,
        auditors, accountants, representatives, spouses and immediate family
        members, and the predecessors, heirs, legatees, successors, assigns,
        agents, executors, devisees, personal representatives, attorneys,
        advisors and administrators of any of them, and the predecessors,
        successors, and assigns of each of the foregoing, and any other Person
        in which any such Person has or had a controlling interest or which is
        or was related to or affiliated with such Person, and any trust of which
        such Person is the settlor or which is for the benefit of such Person or
        member(s) of his or her family; provided, however, that PwC, its
        partners and employees are excluded from this definition and shall not
        be deemed to be a Related Person of any Settling Party.

                1.57.   "Released Claims" means the Released Securities Claims,
        the Released Derivative Claims and the Released ERISA Claims.

                1.58.   "Released Derivative Claims" has the meaning assigned to
        such term in Section 3.9.

                1.59.   "Released Derivative Parties" means the Settling
        Derivative Defendants, the Plan, GKH, and Schlumberger, and each of
        their respective Related Persons.

                1.60.   "Released ERISA Claims" has the meaning assigned to such
        term in Section 4.9.

                                       13



                1.61.   "Released ERISA Parties" means the Settling ERISA
        Defendants, Karen L. O'Connor, as the Independent Executrix of the
        Estate of Michael A. O'Connor, Deceased, GKH, and Schlumberger, and each
        of their respective Related Persons, the Plan, and any Person who was or
        could be deemed a fiduciary of the Plan during the Class Period.

                1.62.   "Released Securities Claims" has the meaning assigned to
        such term in Section 2.13.

                1.63.   "Released Securities Parties" means the Settling
        Securities Defendants, the Plan, Karen L. O'Connor, as the Independent
        Executrix of the Estate of Michael A. O'Connor, Deceased, Schlumberger,
        and GKH, and each of their respective Related Persons.

                1.64.   "Schlumberger" means Schlumberger Technology
        Corporation, Schlumberger Oilfield Holdings Limited, and Schlumberger
        Surenco S.A.

                1.65.   "Securities Act" means the Securities Act of 1933, as
        amended.

                1.66.   "Securities Actions" has the meaning assigned to such
        term in the Recitals hereof.

                1.67.   "Securities Plaintiff Class" means all Persons who
        purchased Hanover Securities during the Class Period (including
        participants in the Plan who, during the Class Period, purchased Hanover
        Securities in their accounts in the Plan or acquired Hanover Securities
        through employer matching contributions) other than (a) those
        individuals who were officers and/or directors of Hanover during the
        Class Period and (i) their affiliates and (ii) members of their
        immediate families, (b) officers and/or directors of Hanover at the
        Effective Date and (i) their affiliates and (ii) members of their

                                       14



        immediate families, (c) the Settling Securities Defendants and (i) their
        affiliates and (ii) members of their immediate families, (d)
        Schlumberger and its subsidiaries, (e) GKH and its subsidiaries and
        affiliates, and (f) the Plan.

                1.68.   "Securities Plan of Allocation" means the terms and
        procedures for allocating the Settlement Fund among, and distributing it
        to, Authorized Securities Claimants as set forth in the Notice, or such
        other Plan of Allocation as the Federal Court shall approve.

               1.69.   "Securities Releases" has the meaning assigned to such
        term in Section 2.13.

                1.70.   "Securities Settlement" means the settlement of the
        Consolidated Securities Action on and subject to the terms and
        conditions set forth in this Stipulation.

                1.71.   "Securities Settlement Cash Fund" has the meaning
        assigned to such term in Section 2.7.

                1.72.   "Securities Settlement Fund" means the Securities
        Settlement Cash Fund, the Securities Settlement Stock Fund, and the
        Securities Settlement Note Fund together with any interest and earnings
        thereon, after deducting the Derivative Settlement Fund and the ERISA
        Settlement Fund.

                1.73.   "Securities Settlement Note Fund" has the meaning
        assigned to such term in Section 2.7.

                1.74.   "Securities Settlement Stock Fund" has the meaning
        assigned to such term in Section 2.7.

                                       15



                1.75.   "Settlement" means the consummation of the events and
        transactions that will fully effectuate the Securities Settlement, the
        ERISA Settlement, and the Derivative Settlement.

                1.76.   "Settlement Fund" means the cash and other property in
        the Securities Settlement Fund, the ERISA Settlement Fund and the
        Derivative Settlement Fund.

                1.77.   "Settlement Hearing" means the hearing or hearings at
        which the Federal Court will review the adequacy, fairness, and
        reasonableness of the settlement.

                1.78.   "Settlement Shares" means the GKH Settlement Shares and
        the Hanover Settlement Shares.

                1.79.   "Settling Action" means each of the Consolidated
        Securities Action, the Derivative Actions and the ERISA Actions.

                1.80.   "Settling Defendants" means the Settling Securities
        Defendants, the Settling Derivative Defendants and the Settling ERISA
        Defendants.

                1.81.   "Settling Defendants' Counsel" means the Settling
        Derivative Defendants' Counsel, Settling ERISA Defendants' Counsel and
        the Settling Securities Defendants' Counsel.

                1.82.   "Settling Derivative Defendants" means Michael A.
        O'Connor, William S. Goldberg, Melvyn N. Klein, Michael J. McGhan, Ted
        Collins, Jr., Robert R. Furgason, Rene J. Huck, Alvin V. Shoemaker,
        Victor E. Grijalva, Gordon T. Hall, I. Jon Brumley, Charles D. Erwin,
        and Hanover.

                1.83.   "Settling Derivative Defendants' Counsel" means Katten,
        Muchin, Zavis & Rosenman, Dechert LLP, Beck, Redden & Secrest, Smyser,
        Kaplan & Veselka, LLP,

                                       16



        Wright & Brown, LLP, Orgain Bell & Tucker, LLP, Skadden, Arps, Slate,
        Meagher & Flom, LLP, and Hughes Hubbard & Reed LLP.

                1.84.   "Settling Derivative Parties" means the Derivative
        Plaintiffs and the Settling Derivative Defendants.

                1.85.   "Settling Derivative Plaintiffs" has the meaning
        assigned to such term in the Recitals hereof.

                1.86.   "Settling Derivative Plaintiffs' Counsel" means Scott &
        Scott, LLC, Reich & Binstock, Maricic & Goldstein, LLP, Robbins, Umeda &
        Fink, LLP, Schubert & Reed LLP, Emerson Poynter LLP, The Brualdi Law
        Firm, and Joseph A. McDermott, III.

                1.87.   "Settling ERISA Defendants" means Hanover, Michael J.
        McGhan, William S. Goldberg, and Michael A. O'Connor.

                1.88.   "Settling ERISA Defendants' Counsel" means Beck Redden &
        Secrest, Wright & Brown, LLP, Orgain Bell & Tucker, LLP, Katten, Muchin,
        Zavis, & Rosenman, and Hughes Hubbard & Reed LLP.

                1.89.   "Settling ERISA Parties" means the Settling ERISA
        Plaintiff Class and the Settling ERISA Defendants.

                1.90.   "Settling ERISA Plaintiff Class" means each and every
        member of the ERISA Plaintiff Class.

                1.91.   "Settling ERISA Plaintiffs' Counsel" means the Baskin
        Law Firm, Hoeffner & Bilek, L.L.P., Schiffrin & Barroway LLP, and
        Brodsky & Smith, LLC.

                1.92.   "Settling Parties" means the Settling Securities
        Parties, the Settling Derivative Parties and the Settling ERISA Parties.

                                       17



                1.93.   "Settling Plaintiffs" means the members of the Settling
        Securities Plaintiff Class, the Settling Derivative Plaintiffs and the
        members of the Settling ERISA Plaintiff Class.

                1.94.   "Settling Plaintiffs' Counsel" means Lead Counsel,
        Settling Derivative Plaintiffs' Counsel and Settling ERISA Plaintiffs'
        Counsel.

                1.95.   "Settling Securities Defendants" means Hanover, Michael
        J. McGhan, William S. Goldberg, Michael A. O'Connor, Charles D. Erwin
        and GKH.

                1.96.   "Settling Securities Defendants' Counsel" means Hughes
        Hubbard & Reed LLP, Katten Muchin Zavis & Rosenman, Dechert LLP, Beck
        Redden & Secrest, Paul Weiss Rifkind, Wharton & Garrison LLP, and Wright
        & Brown, LLP, Orgain Bell & Tucker, LLP.

                1.97.   "Settling Securities Parties" means the Settling
        Securities Plaintiff Class and the Settling Securities Defendants.

                1.98.   "Settling Securities Plaintiff Class" or "Settling
        Securities Plaintiffs" means each and every member of the Securities
        Plaintiff Class other than those Persons who timely and validly exclude
        themselves from participating in the Securities Settlement.

                1.99.   "State Derivative Action" has the meaning assigned to
        such term in the Recitals hereof.

                1.100.  "Stipulation" means this Stipulation and Agreement of
        Settlement.

                1.101.  "Supplemental Securities Agreement" means that certain
        confidential Supplemental Securities Agreement, provided for in Section
        2.15,, by and among the

                                       18



        Settling Securities Parties, providing certain additional terms upon
        which Hanover may terminate this Stipulation.

                1.102.  "Taxes" has the meaning assigned to such term in Section
        7.3.

                1.103.  "Tax Expenses" has the meaning assigned to such term in
        Section 7.3

                1.104.  "Tolling Agreement" has the meaning assigned to such
        term in the Recitals hereof.

                1.105.  "Transfer Agent" means the firm of Mellon Shareholder
        Services.

                1.106.  "Unknown Claims" means, with respect to a Settling
        Party, any and all claims which such Settling Party does not know or
        suspect to exist in his, her or its favor at the time such Settling
        Party releases such claims which, if known by him, her or it, might or
        would have affected his, her or its decision not to object to such
        release or not to exclude himself, herself or itself from becoming a
        Class Member.

2.      SETTLEMENT OF CONSOLIDATED SECURITIES ACTION

                2.1.    Settling Securities Defendants' Denial of Liability. The
        Settling Securities Defendants have denied, and continue to deny, that
        they have any liability as a result of any and all allegations that have
        been or could be made in the Consolidated Securities Action. The
        Settling Securities Defendants are entering into the Securities
        Settlement in order to eliminate the burden, distraction, expense and
        uncertainty of further litigation.

                2.2.    GKH's Contribution and Settlement of Any and All
        Remaining Claims. GKH has entered into the Securities Settlement and GKH
        Partners, L.P. and GKH Investments, L.P., have agreed to pay two million
        five hundred thousand (2,500,000) shares of Hanover Common Stock to
        settle all potential liability it might have in connection with the
        Consolidated Securities Action.

                                       19



                2.3.    Corporate Governance. Hanover will implement the
        corporate governance enhancements, which were the subject of substantial
        negotiation by and among the Settling Parties and the Settling Parties'
        Counsel, in the time periods and in the manner contemplated by the
        Governance Term Sheet.

                2.4.    Payment to Authorized Securities Claimants. The
        Securities Settlement Fund shall be distributed by or at the direction
        of the Claims Administrator to the Authorized Securities Claimants in
        the Consolidated Securities Action in accordance with the Securities
        Plan of Allocation.

                2.5.    Securities Notice. The Claims Administrator, appointed
        and subject to the supervision and direction of the Federal Court, shall
        be responsible for providing individual notice to the Securities
        Plaintiff Class, in substantially the form as attached hereto as Exhibit
        C, providing for an opt-out time period of no less than forty (40) days
        from the date the Notice is mailed, and as otherwise directed by the
        Federal Court, as well as any other required or appropriate notice to be
        made by publication or otherwise.

                2.6.    Reliance Upon Own Knowledge. Lead Plaintiffs expressly
        represent and warrant that, in entering into the Securities Settlement,
        they relied upon their own knowledge and investigation (including the
        knowledge of and investigation performed by Lead Counsel), and not upon
        any promise, representation, warranty or other statement made by or on
        behalf of any of the Settling Securities Defendants or their Related
        Persons not expressly contained in this Stipulation.

                2.7.    Securities Settlement Fund. The following consideration
        will be or has been paid to the Securities Settlement Fund in connection
        with the Securities Settlement:

                                       20



                        (a)     Cash. Hanover has contributed twenty-nine
                million five hundred thousand dollars ($29,500,000) into the
                Escrow Fund which, with interest and earnings thereon, and such
                other amounts as are contributed to the Securities Settlement
                Cash Fund pursuant to the terms of this subsection (a) shall
                constitute the "Securities Settlement Cash Fund" as of the date
                hereof and shall be held by the Escrow Agent pursuant to the
                terms of this Stipulation. Hanover shall make an additional
                deposit of cash into the Securities Settlement Cash Fund in an
                amount equal to three million dollars ($3,000,000) within five
                (5) business days after a Change of Control, but only if either
                the Change of Control or the shareholder approval of such Change
                of Control occurs prior to the end of the twelve (12) months
                following the Order and Final Judgment approving the Securities
                Settlement.

                        (b)     Settlement Shares. Within (i) five (5) business
                days after the Effective Date, Hanover shall deliver to the
                Escrow Agent the Hanover Settlement Shares and, (ii) thirty (30)
                business days after the Effective Date, GKH Partners, L.P. and
                GKH Investments, L.P., shall deliver to the Escrow Agent the GKH
                Settlement Shares (collectively, the "Securities Settlement
                Stock Fund"). The Settlement Shares shall be registered under
                the Securities Act or exempt from registration under the
                Securities Act. All costs, including those of the Transfer
                Agent, incurred in issuing and distributing the Settlement
                Shares to the Authorized Securities Claimants pursuant hereto
                shall be borne by Hanover. The total number of Settlement Shares
                to be contributed into the Securities Settlement Stock Fund will
                be adjusted by Hanover's Board of Directors in its good faith

                                       21



                judgment to reflect any changes to Hanover Common Stock due to
                stock splits, stock dividends or reverse stock splits occurring
                after May 12, 2003 and prior to the date of delivery to the
                Escrow Agent.

                        (c)     Note. Within thirty (30) business days after the
                Effective Date, Hanover shall deliver the Note to the Escrow
                Agent. Such note and all proceeds therefrom shall constitute the
                "Securities Settlement Note Fund."

                2.8.    Cost of Notice. Lead Counsel may withdraw an amount of
        cash up to one hundred thousand dollars ($100,000) from the Securities
        Settlement Cash Fund to pay actual costs incurred in connection with
        providing the Notice required by Section 2.5.

                2.9.    Procedure with Respect to the Settlement Shares.

                        (a)     Distribution to Lead Counsel. No earlier than
                five (5) business days after the Effective Date, the Escrow
                Agent, if requested by Lead Counsel, shall take such actions as
                are necessary and appropriate to ensure the issuance by Hanover
                of share certificates representing the Hanover Settlement Shares
                to be delivered to plaintiffs' counsel as directed by the Fee
                and Expense Award entered as part of the Securities Settlement.

                        (b)     Distribution to Authorized Securities Claimants.
                Upon notice from the Claims Administrator that the Claims
                Administrator's process has been complete, the Escrow Agent
                shall tender to Hanover the certificates evidencing the
                remaining Hanover Settlement Shares and the GKH Settlement
                Shares (with any necessary endorsements) and request that
                Hanover (or its designee) issue share certificates as directed
                by the Claims Administrator and consistent with this Stipulation
                and orders of the Federal Court.

                                       22



                        (c)     Fractional Shares. The Claims Administrator
                shall be directed that no fractional Settlement Shares will be
                distributed or allocated to or on behalf of any Person. In
                addition, the Settlement Fund may liquidate Settlement Shares to
                pay Taxes incurred by the Settlement Fund.

                2.10.   Rights With Respect to the Settlement Shares. Ten (10)
        days before the date of the Settlement Hearing for the Securities
        Settlement, Hanover shall provide Lead Counsel with (a) the written
        opinion of outside counsel that the Hanover Settlement Shares, when
        issued in accordance with this Stipulation, will be validly issued,
        fully paid and non-assessable and (b) either (i) the written opinion of
        outside counsel or (ii) a no-action letter from the Securities and
        Exchange Commission, addressed to either Hughes Hubbard & Reed LLP or
        Hanover, substantially to the effect that (A) the Hanover Settlement
        Shares will be issued in compliance with the registration requirements
        of Section 5 of the Securities Act or will be issued in reliance upon an
        exemption therefrom and (B) the Hanover Settlement Shares will not be
        deemed to be "restricted securities" within the meaning of Rule
        144(a)(3) promulgated under the Securities Act (except that affiliates
        of Hanover, before or after the Effective Date, may be required to sell
        such shares in accordance with Rule 144 promulgated under the Securities
        Act).

                2.11.   Attorneys' Fees. Lead Counsel may apply to the Federal
        Court for an award of attorneys' fees and reimbursement of all expenses
        incurred on behalf of the Securities Plaintiff Class. Such fees and
        expenses, and interest thereon, shall be payable solely out of the
        Securities Settlement Fund and shall be deducted therefrom prior to the
        distribution thereof to the Settling Securities Plaintiff Class.
        Following entry of any order

                                       23



        by the Federal Court approving any fees and expenses to Lead Counsel,
        Lead Counsel may withdraw from the Securities Settlement Fund the fees
        and expenses so awarded; provided, however, that (a) prior to the
        Effective Date, such withdrawal must be cash only from the Securities
        Settlement Cash Fund and, (b) in the event that the order approving the
        fees and expenses so awarded is reversed or modified on appeal, Lead
        Counsel shall, within five (5) business days of the date which the fees
        and expenses award is modified or reversed, refund to the Securities
        Settlement Fund the fees and expenses previously distributed in full or
        in any amount consistent with such reversal or modification, plus
        interest thereon at the rate earned on the Securities Settlement Cash
        Fund through the date of such refund.

                2.12.   Conditions. The Securities Settlement shall terminate
        and be of no further force or effect if any of the conditions in Section
        5.1 and 5.3 or any of the conditions set forth below are not satisfied
        or, with respect to the conditions in Section 2.12(b), (c), and (d),
        waived by Hanover:

                        (a)     the funding of the Securities Settlement Fund as
                provided above;

                        (b)     Hanover's failure to exercise its termination
                rights, if any, under the Supplemental Securities Settlement
                Agreement;

                        (c)     preliminary approval by the Federal Court of the
                Settlement; and

                        (d)     the Order and Final Judgment entered by the
                Federal Court, approving the Securities Settlement and providing
                for the Securities Releases and the bar order provided for in
                Section 2.14, becoming Final.

                2.13.   Securities Releases. Upon the Effective Date, the
        Settling Securities Plaintiff Class, and each of their respective
        successors, predecessors, assigns, attorneys

                                       24



        (including Lead Counsel), heirs, representatives, administrators,
        executors, devisees, legatees, and estates, release and forever
        discharge any and all claims, rights and causes of action, direct and
        derivative, whether based on federal, state, local, statutory or common
        law or any other law, rule or regulation, including, without limitation,
        Unknown Claims, claims under ERISA and claims under federal and state
        securities laws, that have been, could have been, or in the future might
        be or could be asserted in any form and in any forum against any of the
        Released Securities Parties that exist, could have existed, or may arise
        in connection with or that relate to both (i) the purchase or sale or
        holding of any Hanover Securities and (ii) any of the transactions
        (including the registration of securities and any failure to deliver
        prospectuses) matters or occurrences, or representations or omissions
        involved, set forth, referred to, or which relate in any way to the
        facts or allegations contained in or which could have been contained in
        the Consolidated Securities Action (including all such claims which
        arise under state or federal securities laws and accrued or are based on
        acts or omissions occurring during or prior to the end of the Class
        Period) (the "Released Securities Claims").

                Upon the Effective Date, the Settling Securities Defendants and
        each of their respective successors, predecessors, assigns, attorneys
        (including Settling Securities Defendants' Counsel), heirs,
        representatives, legatees, administrators, devisees, executors and
        estates release and forever discharge any and all claims, rights and
        causes of action, whether based on federal, state, local, statutory or
        common law or any other law, rule or regulation, and whether known or
        unknown, that have been, could have been, or in the future might be
        asserted in any form or forum against any member of the Settling
        Securities Plaintiff Class or Lead Counsel that exist, could have
        existed, or may arise in

                                       25



        connection with or that relate to the institution, prosecution or
        settlement of any and all claims asserted in the Consolidated Securities
        Action, including, but not limited to, any action for costs or
        attorneys' fees.

                The releases contained in this Section (the "Securities
        Releases") shall apply to each and every member of the Settling
        Securities Plaintiff Class and their counsel, including Lead Counsel,
        each and every Released Securities Party and each and every Settling
        Securities Defendants' Counsel, and the respective successors and
        assigns of any of the foregoing, whether directly or indirectly,
        representatively, derivatively or in any other capacity. The Securities
        Releases shall not apply to and are not intended to release any claims
        of the members of the Settling Securities Plaintiff Class against PwC or
        its partners or employees, including the claims asserted in the
        Consolidated Federal Securities Complaint.

                The Securities Releases also apply to Unknown Claims, and the
        Settling Securities Parties, Settling Securities Defendants' Counsel and
        Lead Counsel agree to waive the benefits of Section 1542 of the
        California Civil Code (and the benefits of any other law (including
        principles of common law) of any state or territory or other
        jurisdiction of the United States or of any jurisdiction outside of the
        United States that is similar, comparable or equivalent to Section 1542
        of the California Civil Code), which provides:

                A general release does not extend to claims which the creditor
                does not know or suspect to exist in his favor at the time of
                executing the release, which if known by him must have
                materially affected his settlement with the debtor.

                Each of the Settling Securities Parties, Lead Counsel and
        Settling Securities Defendants' Counsel acknowledges that the foregoing
        waiver was separately bargained for and is a material term of the
        Securities Settlement.

                                       26



                2.14.   Securities Bar Order. The Order and Final Judgment shall
        include a bar order permanently and forever barring and enjoining all
        Persons, specifically including but not limited to PwC, other than those
        Persons that timely and properly exclude themselves from the Settling
        Securities Plaintiff Class, from filing, commencing, instituting,
        prosecuting or maintaining, either directly, indirectly,
        representatively or in any other capacity, any claim, counterclaim,
        cross-claim, third-party claim or other action against any of the
        Released Securities Parties arising out of, based upon or relating to
        the transactions and occurrences referred to in the facts and
        allegations contained in the Consolidated Securities Action, including
        without limitation any claim or action seeking indemnification or
        contribution, however denominated, and any claim or action, whether
        legal or equitable in nature, known or unknown, foreseen or unforeseen,
        accrued or unaccrued, matured or unmatured, or for damages or permitted
        costs and expenses (including attorneys' fees). All such claims and
        actions are hereby extinguished, discharged, satisfied and
        unenforceable.

                Such order shall include a provision that a Final verdict or
        judgment against PwC shall be reduced (up to the amount of such verdict
        or judgment) by the greater of: (a) an amount that corresponds to the
        percentage of responsibility of the Released Securities Parties for the
        liability at issue; or (b) the amount paid to settle the Consolidated
        Securities Action pursuant to this Stipulation. Such order shall also
        prohibit any member of the Settling Securities Plaintiff Class from
        settling any claim against PwC without also obtaining from PwC a release
        running in favor of every Released Securities Party that is at least as
        broad as the Securities Release; provided, however that this bar order
        shall not

                                       27



        apply to any indemnification obligations owed by Hanover under its
        by-laws or Articles of Incorporation to the other Settling Defendants.

                2.15.   Supplemental Securities Agreement. Within ten (10)
        business days after the date hereof, Lead Counsel and Hughes Hubbard &
        Reed LLP shall enter into a Supplemental Securities Agreement providing
        for the termination of the Securities Settlement at the sole election of
        Hanover, in the exercise of its absolute discretion, in the event that,
        after the execution of the Stipulation, members of the Securities
        Plaintiff Class owning a specified percentage of Hanover Securities
        purchased during the Class Period deliver timely and otherwise valid
        requests for exclusion from the Securities Plaintiff Class or initiate
        actions regarding, or assert any of, the Released Claims against one or
        more of the Settling Securities Defendants. The Supplemental Securities
        Agreement shall be held confidential in accordance with its terms.

                2.16.   Reimbursement of Lead Plaintiffs. The Lead Plaintiffs
        may seek Federal Court approval of such amounts as allowed by Section
        21D of the Exchange Act.

3.      SETTLEMENT OF CONSOLIDATED DERIVATIVE ACTION

                3.1.    Settling Derivative Defendants' Denial of Liability. The
        Settling Derivative Defendants have denied, and continue to deny, that
        they have any liability as a result of any and all allegations that have
        been or could be made in the Derivative Actions. The Settling Derivative
        Defendants are entering into the Derivative Settlement in order to
        eliminate the burden, distraction, expense and uncertainty of further
        litigation.

                3.2.    Reliance Upon Own Knowledge. The Settling Derivative
        Plaintiffs expressly represent and warrant that, in entering into the
        Derivative Settlement, they relied upon their own knowledge and
        investigation (including the knowledge of and

                                       28



        investigation performed by counsel), and not upon any promise,
        representation, warranty or other statement made by or on behalf of any
        of the Settling Derivative Defendants or their Related Persons not
        expressly contained in this Stipulation.

                3.3.    Corporate Governance. Hanover will implement the
        corporate governance enhancements, which were the subject of substantial
        negotiation by and among the Settling Parties and the Settling
        Derivative Plaintiffs' Counsel, in the time periods and in the manner
        contemplated by the Governance Term Sheet.

                3.4.    Role of Settling Derivative Plaintiffs' Counsel.
        Settling Derivative Plaintiffs, through Settling Derivative Plaintiffs'
        Counsel, were material participants in the settlement negotiations
        relating to the Derivative Actions and were a substantial factor in
        obtaining the following benefits for Hanover:

                        (a)     payment of at least twenty six million six
                hundred fifty thousand dollars ($26,650,000) by Hanover's
                insurance carriers toward the Settlement;

                        (b)     contribution of the GKH Settlement Shares into
                the Securities Settlement Stock Fund; and

                        (c)     substantial corporate governance enhancements as
                detailed in the Governance Term Sheet.

                3.5.    Derivative Notice. Settling Derivative Plaintiff's
        Counsel shall be responsible for printing and mailing appropriate
        court-directed individual notice to the shareholders of Hanover entitled
        to receive such notice, substantially in the form of Exhibit D, as well
        as any other required or appropriate notice to be made by publication or
        otherwise.

                                       29



                3.6.    Payments. Within three (3) business days after
        preliminary approval of the Derivative Settlement, Hanover shall pay
        seventy five thousand dollars ($75,000) to counsel for the plaintiffs in
        the derivative action, Koch v. O'Connor, et al., as payment for
        providing the Notice required by Section 3.5. Within three (3) business
        days after the entry of the Order and Final Judgment, Hanover shall
        contribute seven hundred thousand dollars ($700,000) to the Securities
        Settlement Cash Fund. Thereafter, provided that the Court has approved
        such a fee and expense award, seventy five thousand (75,000) shares of
        Hanover Common Stock from the Securities Settlement Stock Fund and seven
        hundred thousand dollars ($700,000) (which shall be deemed to have been
        contributed by Hanover's directors and officers insurance carriers)
        withdrawn from the Securities Settlement Cash Fund shall be paid to
        Settling Derivative Plaintiffs' Counsel, of which three hundred thousand
        dollars ($300,000) shall be allocated and paid to The Brualdi Law Firm.

                3.7.    Attorneys' Fees. In the event that the order approving
        the fee and expenses so awarded is reversed or modified on appeal, and
        in the event that any Settling Derivative Plaintiffs' Counsel has
        received payment, such counsel shall, within five (5) business days of
        the date which the fee and expense award is modified or reversed, refund
        to the Derivative Settlement Fund the fees and expenses previously
        received by them in full or in any amount consistent with such reversal
        or modification, plus interest thereon at the rate earned on the
        Securities Settlement Cash Fund through the date of such refund. Lead
        Counsel shall refund, within ten (10) business days of any modification
        or reversal of a fee or expense award, any fees and expenses received,

                                       30



        which are required to be but are not refunded, by any Settling
        Derivative Plaintiffs' Counsel as directed above.

                3.8.    Conditions. The Derivative Settlement shall terminate
        and be of no further force or effect if any of the conditions in Section
        5.1 and 5.3, or any of the conditions set forth below, are not satisfied
        or, with respect to the conditions in Section 3.8 (a), (b), and (d),
        waived by Hanover:

                        (a)     dismissal with prejudice of the State Derivative
                Action without additional consideration;

                        (b)     preliminary approval of the Derivative
                Settlement by the Federal Court;

                        (c)     payment of any fee and expense award to Settling
                Derivative Plaintiffs' Counsel directed by the Federal Court;
                and

                        (d)     the Order and Final Judgment by the Federal
                Court, approving the Derivative Settlement and providing for the
                Derivative Releases and bar order provided for in Section 3.10,
                becoming Final.

                3.9.    Derivative Releases. Upon the Effective Date, the
        Settling Derivative Plaintiffs, Hanover, and Hanover Shareholders, and
        each of their respective successors, predecessors, assigns, attorneys
        (including Settling Derivative Plaintiffs' Counsel), heirs,
        representatives, legatees, devisees, administrators, executors, and
        estates, release and forever discharge any and all claims, rights and
        causes of action, whether based on federal, state, local, statutory or
        common law or any other law, rule or regulation, including, without
        limitation, Unknown Claims and claims under ERISA, Delaware statutory
        and common law, federal and state securities laws and claims under any
        law

                                       31



        governing fiduciaries or the duties of fiduciaries, that have been,
        could have been, or in the future might be or could be asserted in any
        form and in any forum by Settling Derivative Plaintiffs or Hanover
        Shareholders against any of the Released Derivative Parties on behalf of
        Hanover that exist, could have existed, or may arise in connection with
        or that relate to the transactions (including the registration of
        securities and any failure to deliver prospectuses), matters or
        occurrences, or representations or omissions involved, set forth,
        referred to, or which relate in any way to the facts or allegations
        contained in or which could have been contained in the Derivative
        Actions, (including, but not limited to, breach of any duty owed to
        Hanover, including the duty of care, loyalty and good faith) (the
        "Released Derivative Claims").

                Upon the Effective Date, the Settling Derivative Defendants and
        each of their respective successors, predecessors, assigns, attorneys
        (including Settling Derivative Defendants' Counsel), heirs,
        representatives, administrators, legatees, devisees, executors and
        estates, release and forever discharge any and all claims, rights and
        cause of action, whether based on federal, state, local, statutory or
        common law or any other law, rule or regulation, and whether known or
        unknown, that have been, could have been, or in the future might be
        asserted in any form or forum against any of the Settling Derivative
        Plaintiffs or any of the Settling Derivative Plaintiffs' Counsel in the
        Derivative Actions in connection with or that exist, could have existed,
        or may arise in connection with or relate to the institution,
        prosecution or settlement of any and all claims asserted in the
        Derivative Actions, including, but not limited to, any action for costs
        or attorneys' fees.

                The releases contained in this Section (the "Derivative
        Releases") shall apply to Hanover, each and every one of the Hanover
        Shareholders, the Settling Derivative

                                       32



        Plaintiffs, each and every Settling Derivative Plaintiffs' Counsel, each
        and every Released Derivative Party and each and every Settling
        Derivative Defendants' Counsel, and the respective successors and
        assigns of any of the foregoing, whether directly or indirectly,
        representatively, derivatively or in any other capacity.

                The Derivative Releases apply to all claims, including Unknown
        Claims, and the Settling Derivative Plaintiffs, Settling Derivative
        Plaintiffs' Counsel, Settling Derivative Defendants and Settling
        Derivative Defendants' Counsel agree to waive the benefits of Section
        1542 of the California Civil Code (and the benefits of any other law
        (including any principle of common law) of any state or territory or
        other jurisdiction of the United States or of any jurisdiction outside
        of the United States that is similar, comparable or equivalent to
        Section 1542 of the California Civil Code), which provides:

                A general release does not extend to claims which the creditor
                does not know or suspect to exist in his favor at the time of
                executing the release, which if known by him must have
                materially affected his settlement with the debtor.

                Each Settling Derivative Plaintiff, Settling Derivative
        Plaintiffs' Counsel, Settling Derivative Defendants and Settling
        Derivative Defendants' Counsel acknowledges that the foregoing waiver
        was separately bargained for and is a material term of the Derivative
        Settlement.

                3.10.   Derivative Bar Order. The Order and Final Judgment shall
        include a bar order permanently and forever barring and enjoining all
        Persons, specifically including but not limited to PwC, from filing,
        commencing, instituting, prosecuting or maintaining, either directly,
        indirectly, representatively or in any other capacity, any claim,
        counterclaim, cross-claim, third-party claim or other action against any
        of the Released Derivative Parties arising out of, based upon or
        relating to the transactions and

                                       33



        occurrences referred to in the facts and allegations contained in the
        Derivative Actions, including without limitation any claim or action
        seeking indemnification or contribution, however denominated, and any
        claim or action, whether legal or equitable in nature, known or unknown,
        foreseen or unforeseen, matured or unmatured, accrued or unaccrued, or
        for damages or permitted costs and expenses (including attorneys' fees).
        All such claims and actions are hereby extinguished, discharged,
        satisfied and unenforceable.

                Such order shall include a provision that a final verdict or
        judgment against a defendant other than a Released Derivative Party in
        the Settling Derivative Action or in any other action arising out of,
        based upon or relating to the transactions and occurrences referred to
        in the complaints in the Derivative Actions shall be reduced (up to the
        amount of such verdict or judgment) by the greater of: (a) an amount
        that corresponds to the percentage of responsibility of the Released
        Derivative Parties for the liability at issue; or (b) the amount paid to
        plaintiffs by the Released Derivative Parties in respect of the
        liability at issue. Such order shall also prohibit any Settling
        Derivative Plaintiff from settling any claim against PwC without also
        obtaining from PwC a release running in favor of every Released
        Derivative Party that is at least as broad as the Derivative Release,
        provided, however that this bar order shall not apply to any
        indemnification obligations owed by Hanover under its by-laws or
        Articles of Incorporation to the other Settling Defendants.

4.      SETTLEMENT OF ERISA ACTIONS

                4.1.    Settling ERISA Defendants' Denial of Liability. The
        Settling ERISA Defendants have denied, and continue to deny, that they
        have liability as a result of any

                                       34



        and all allegations that have been or could be made in the ERISA
        Actions. The Settling ERISA Defendants are entering into the ERISA
        Settlement in order to eliminate the burden, distraction, expense and
        uncertainty of further litigation.

                4.2.    ERISA Settlement Fund. The Escrow Agent shall allocate
        an amount (the "ERISA Settlement Fund") equal to one million seven
        hundred seventy five thousand dollars ($1,775,000) in cash from the
        Securities Settlement Cash Fund, plus interest earned thereon, to fund
        payments relating to the ERISA Settlement.

                4.3.    Settled Claims. The ERISA Settlement contemplated herein
        shall be a settlement both of the claims made on a class action basis
        and a settlement of the claims made to or on behalf of the Plan.Reliance
        Upon Own Knowledge. The ERISA Plaintiffs expressly represent and warrant
        that, in entering into this ERISA Settlement, they relied upon their own
        knowledge and investigation (including the knowledge of and
        investigation performed by Settling ERISA Plaintiffs' Counsel), and not
        upon any promise, representation, warranty or other statement made by or
        on behalf of any of the Settling ERISA Defendants or their Related
        Persons not expressly contained in this Stipulation.

                4.4.    Structural and Equitable Relief. Each participant in, or
        beneficiary under, the Plan shall have the right to direct the
        investment of his or her employer contribution to the Plan, upon the
        vesting thereof, in the same manner and among the same investment
        alternatives as are available for the investment of employee
        contributions to the Plan (provided, however, that the employer
        contributions may continue to be made in the form of Hanover Common
        Stock).

                                       35



                4.5.    Attorneys' Fees. Settling ERISA Plaintiffs' Counsel may
        apply to the Federal Court for an award of attorneys' fees and
        reimbursement of all expenses incurred by them on behalf of the Settling
        ERISA Plaintiff Class. Such fees and expenses, and interest thereon,
        shall be payable out of the ERISA Settlement Fund and shall be deducted
        from the ERISA Settlement Fund prior to the distribution thereof to the
        Plan. Following entry of any order by the Federal Court approving afees
        and expenses to Settling ERISA Plaintiffs' Counsel, Lead Counsel may
        withdraw from the ERISA Settlement Fund, and allocate the fees and
        expenses so awarded, provided, however that in the event that the order
        approving the fee and expenses so awarded is reversed or modified on
        appeal, and in the event that any Settling ERISA Plaintiffs' Counsel has
        received payment, such counsel shall, within five (5) business days of
        the date which the fee and expense award is modified or reversed, refund
        to the ERISA Settlement Fund the fees and expenses previously received
        by them in full or in any amount consistent with such reversal or
        modification, plus interest thereon at the rate earned on the Securities
        Settlement Cash Fund through the date of such refund. Lead Counsel shall
        refund, within ten (10) business days of any modification or reversal of
        a fee or expense award, any fee and expense amount discussed above which
        is not refunded by any Settling ERISA Plaintiffs' Counsel as directed
        above.

                4.6.    Award to Named ERISA Plaintiff. The named plaintiff in
        Kirkley v. Hanover, et al., Case No. H-03-1155, will submit to the
        Federal Court an application for an award, in recognition of his
        services, not to exceed two thousand five hundred dollars ($2,500),
        which award shall be withdrawn from the ERISA Settlement Fund portion of

                                       36



        the Securities Settlement Cash Fund. Such award, if approved, shall be
        paid from the ERISA Settlement Fund prior to distribution of the balance
        thereof to the Plan.

                4.7.    Notice. The Claims Administrator shall be responsible
        for providing the Notice to the members of the Settling ERISA Plaintiff
        Class, substantially in the form of Exhibit E, as well as any other
        required or appropriate notice to be made by publication or otherwise,
        all costs of which shall be paid by the Plan or Hanover.

                4.8.    Conditions. The ERISA Settlement shall terminate and be
        of no further force or effect if any of the conditions in Section 5.1
        and 5.3, or any of the conditions set forth below, are not satisfied or,
        with respect to the conditions in Section 4.8 (c) and (d), waived by
        Hanover:

                        (a)     the funding of the ERISA Settlement Fund as
                provided herein;

                        (b)     the implementation of the structural and
                equitable relief contemplated in Section 4.4 above;

                        (c)     preliminary approval by the Federal Court of the
                ERISA Settlement except with respect to attorneys' fees; and

                        (d)     The Order and Final Judgment by the Federal
                Court, approving the ERISA Settlement and providing for the
                ERISA Releases and bar order provided for in Section 4.10
                becoming Final.

                4.9.    ERISA Releases. Upon the Effective Date the Settling
        ERISA Plaintiff Class (and each of their respective successors,
        predecessors, assigns, attorneys (including Settling ERISA Plaintiffs'
        Counsel) heirs, representatives, administrators, legatees, devisees,
        executors and estates release and forever discharge any and all claims,
        rights and causes of action, whether based on federal, state, local,
        statutory or common law or

                                       37



        any other law, rule or regulation, including Unknown Claims, that have
        been, could have been, or in the future might be or could be asserted in
        any form or forum against any of the Released ERISA Parties in
        connection with or that exist, could have existed, or may arise as to
        the transactions, matters or occurrences, representations or omissions,
        involved, set forth, referred to, or which relate in any way to the
        facts of and allegations contained in the ERISA Actions including, but
        not limited to, claims for negligence, gross negligence, professional
        negligence, breach of duty of care and/or breach of duty of loyalty
        and/or breach of duty of candor, fraud, breach of fiduciary duty,
        mismanagement, corporate waste, malpractice, breach of contract,
        negligent or willful misrepresentation, and violations of ERISA or other
        state or federal statutes, rules or regulations, provided, however, that
        the releases shall be limited to matters pertaining to the Plan that
        were or could have been prosecuted on a Plan-wide or Class-wide basis
        (the "Released ERISA Claims").

                Upon the Effective Date, the Settling ERISA Defendants and GKH
        and each of their respective successors, predecessors, assigns,
        attorneys (including Settling ERISA Defendants' Counsel), heirs,
        representatives, administrators, legatees, devisees, executors and
        estates release and forever discharge any and all claims, rights and
        cause of action, whether based on federal, state, local, statutory or
        common law or any other law, rule or regulation, and whether known or
        unknown, that have been, could have been, or in the future might be
        asserted in any form or forum against any member of the Settling ERISA
        Plaintiff Class or any of the Settling ERISA Plaintiffs' Counsel in the
        Settling ERISA Actions in connection with or that exist, could have
        existed, or may arise as to the

                                       38



        institution, prosecution or settlement of any and all claims asserted in
        the Settling ERISA Actions, including, but not limited to, any action
        for costs or attorneys' fees.

                The releases contained in this Section (the "ERISA Releases")
        shall apply to each and every member of the Settling ERISA Plaintiff
        Class, each and every Settling ERISA Plaintiffs' Counsel, each and every
        Released ERISA Party and each and every Settling ERISA Defendants'
        Counsel, and the respective successors and assigns of any of the
        foregoing, whether directly or indirectly, representatively,
        derivatively or in any other capacity.

                The ERISA Releases apply to all claims, including Unknown
        Claims, and the Settling ERISA Plaintiff Class, Settling ERISA
        Plaintiffs' Counsel, Settling ERISA Defendants and Settling ERISA
        Defendants' Counsel agree to waive the benefits of Section 1542 of the
        California Civil Code (and the benefits of any other law (including any
        principle of common law) of any state or territory or other jurisdiction
        of the United States or of any jurisdiction outside of the United States
        that is similar, comparable or equivalent to Section 1542 of the
        California Civil Code), which provides:

                A general release does not extend to claims which the creditor
                does not know or suspect to exist in his favor at the time of
                executing the release, which if known by him must have
                materially affected his settlement with the debtor.

                Each member of the Settling ERISA Plaintiff Class, Settling
        ERISA Plaintiffs' Counsel, Settling ERISA Defendants and Settling ERISA
        Defendants' Counsel acknowledges that the foregoing waiver was
        separately bargained for and is a material term of the ERISA Settlement.

                4.10.   ERISA Bar Order. The Order and Final Judgment shall
        include a bar order permanently and forever barring and enjoining all
        Persons, specifically including

                                       39



        but not limited to PwC, from filing, commencing, instituting,
        prosecuting or maintaining, either directly, indirectly,
        representatively or in any other capacity, any claim, counterclaim,
        cross-claim, third-party claim or other action against any of the
        Released ERISA Parties arising out of, based upon or relating to the
        transactions and occurrences referred to in the facts and allegations
        contained in the ERISA Actions, including without limitation any claim
        or action seeking indemnification and/or contribution, however
        denominated, and any claim or action whether legal or equitable in
        nature, known or unknown, foreseen or unforeseen, matured or unmatured,
        accrued or unaccrued, or for damages or permitted costs and expenses
        (including attorneys' fees). All such claims and actions are hereby
        extinguished, discharged, satisfied and unenforceable.

                Such order shall include a provision that a Final verdict or
        judgment against a defendant other than a Released ERISA Party in any of
        the ERISA Actions or in any other action arising out of, based upon or
        relating to the transactions and occurrences referred to in the
        complaints in the ERISA Actions shall be reduced (up to the amount of
        such verdict or judgment) by the greater of: (a) an amount that
        corresponds to the percentage of responsibility of the Released ERISA
        Parties for the liability at issue; or (b) the amount paid to plaintiffs
        by the Released ERISA Parties in respect of the liability at issue. Such
        order shall also prohibit the Settling ERISA Plaintiff Class and the
        Settling ERISA Plaintiffs' Counsel from settling any claim against a
        Non-Settling Defendant without also obtaining from such Non-Settling
        ERISA Defendant a release running in favor of every Released ERISA Party
        that is at least as broad as the ERISA Release, provided, however that
        this bar order shall not apply to any indemnification obligations

                                       40



        owed by Hanover under its by-laws or Articles of Incorporation to the
        other Settling Defendants.

                4.11.   Payment to Authorized ERISA Claimants. The ERISA
        Settlement Fund shall be distributed by the Claims Administrator to the
        Plan for redistribution to Authorized ERISA Claimants, both in
        accordance with the ERISA Plan of Allocation.

5.      ADDITIONAL CONDITIONS TO EFFECTIVENESS OF THE SETTLEMENT

                5.1.    Approval. Hanover shall have obtained such consents,
        waivers and approvals from its banks and other lenders as it deems
        necessary in connection with the Settlement, all of which Hanover shall
        seek in good faith.

                5.2.    Performance by GKH. GKH shall have performed all
        obligations to be performed by it as provided in this Stipulation and in
        the Letter Agreement.

                5.3.    Cross-Contingency. In the event that the Federal Court
        does not approve all of the Securities Settlement, the ERISA Settlement,
        and the Derivative Settlement, Hanover may, in its sole discretion,
        terminate any or all of the (1) Securities Settlement, (2) Derivative
        Settlement, and (3) ERISA Settlement, provided, however, that nothing
        herein shall inhibit Hanover from consummating any of the Securities
        Settlement, Derivative Settlement, or ERISA Settlement despite the
        disapproval of any of such Settlements.

                5.4.    Performance by Hanover. Hanover shall have performed all
        obligations to be performed by it on or prior to the Effective Date as
        provided in this Stipulation and in the Letter Agreement.

                                       41



6.      ESCROW MATTERS

                6.1.    Appointment of Escrow Agent. Pursuant to the terms
        hereof, Milberg Weiss is hereby appointed the Escrow Agent and Milberg
        Weiss accepts the duties and obligations of the Escrow Agent set forth
        herein.

                6.2.    Investment of Settlement Fund. The Escrow Agent shall
        invest the Securities Settlement Cash Fund in instruments backed by the
        full faith and credit of the United States Government with a maturity of
        not more than 90 days, and reinvest the proceeds of such instruments in
        the same manner as they mature, and may deposit a portion of the cash
        portion of the Securities Settlement Cash Fund into an interest bearing
        account in which the funds held therein are at all times fully insured
        by the Federal Deposit Insurance Corporation (or any successor thereto).

                6.3.    Distribution of Settlement Fund. The Settlement Fund
        shall be distributed (or the instruments in which the Securities
        Settlement Cash Fund is invested distributed) by the Escrow Agent only
        at such time or times and in such manner as is expressly set forth
        herein or as otherwise authorized or directed by the Federal Court.

                6.4.    Concerning the Escrow Agent. The Escrow Agent further
        covenants and agrees with the Settling Defendants that:

                        (a)     Except as is otherwise agreed by the Settling
                Defendants and the Escrow Agent, the Escrow Agent shall not
                invest any funds held hereunder except as directed pursuant to
                this Stipulation. Uninvested funds held hereunder shall not earn
                or accrue interest.

                        (b)     This Stipulation (including the Note) sets forth
                certain duties of Milberg Weiss in its capacity as the Escrow
                Agent, but does not relieve Milberg

                                       42



                Weiss of, and Milberg Weiss remains obligated to comply with,
                its obligations as Lead Counsel or otherwise that may be
                contained elsewhere in this Stipulation or any other agreement
                entered into between the Settling Defendants and Lead Counsel
                (or their respective representatives or counsel).

                        (c)     To induce the Escrow Agent to act as such
                hereunder, the Escrow Agent shall be entitled to rely, if it is
                acting in good faith, upon any order, judgment, certification,
                demand, notice, instrument or other writing delivered to it
                hereunder without being required to determine the authenticity
                or the correctness of any fact stated therein or the propriety
                or validity or the service thereof. The Escrow Agent may, if it
                is acting in good faith, act in reliance upon any instrument or
                signature believed by it to be genuine and may assume that any
                person purporting to give receipt or advice or make any
                statement or execute any document in connection with the
                provisions hereof has been duly authorized to do so.

                        (d)     Except and to the extent Lead Counsel is
                otherwise permitted to make a withdrawal to pay counsel fees and
                expenses pursuant to this Stipulation, the Escrow Agent does not
                have any beneficial interest in the Settlement Fund, but is
                serving as escrow holder only and having only possession thereof
                subject to the terms hereof, and the Escrow Agent shall not be
                entitled to any fees or other compensation for, or reimbursement
                for any expenses incurred in connection with, the services to be
                rendered by the Escrow Agent hereunder.

                        (e)     Until the Effective Date, the Escrow Agent (and
                any successor Escrow Agent) may be removed or may resign only
                upon the execution by the

                                       43



                Settling Defendants and the Escrow Agent of an instrument to
                that effect. Upon the removal or resignation of the Escrow Agent
                in accordance with the foregoing sentence, the Escrow Agent (and
                any successor Escrow Agent) shall deliver the Settlement Fund to
                any successor Escrow Agent designated in writing or, if no such
                successor is so designated, to the Federal Court, whereupon the
                Escrow Agent shall be discharged of and from any and all
                obligations under this Section 6.

                        (f)     In the event of any disagreement between the
                Settling Parties resulting in adverse claims or demands being
                made in connection with the Settlement Fund, or in the event
                that the Escrow Agent in good faith is in doubt as to what
                action it should take hereunder, the Escrow Agent shall be
                entitled to retain the Settlement Fund until the Escrow Agent
                shall have received (i) a Final non-appealable order of the
                Federal Court directing delivery of the Settlement Fund or (ii)
                a written agreement executed by the Escrow Agent and the
                Settling Defendants directing delivery of the Settlement Fund,
                in which event the Escrow Agent shall disburse the Settlement
                Fund in accordance with such order or agreement.

7.      TAX MATTERS

                7.1.    Qualified Settlement Fund. The Settling Parties and the
        Escrow Agent agree that the Settlement Fund and all of its constituent
        parts (including the Securities Settlement Cash Fund, the Securities
        Settlement Note Fund, and the Securities Settlement Stock Fund), shall
        be a "qualified settlement fund" within the meaning of Treas. Reg. Sec.
        1.468B-1 at all times after preliminary approval of this Stipulation by
        the Federal

                                       44



        Court, it being agreed that preliminary approval of this Stipulation
        shall constitute Federal Court approval of the establishment of the
        Settlement Fund and all of its constituent parts (including the
        Securities Settlement Cash Fund, the Securities Settlement Note Fund and
        the Securities Settlement Stock Fund). In addition, the Escrow Agent
        shall, if and only if Hanover so requests, timely make such elections as
        necessary or advisable to carry out the provisions of this Section 7.1,
        including a "relation-back election" (as defined in Treas. Reg. Sec.
        1.468B-1). Such elections shall be made in compliance with the
        procedures and requirements contained in the applicable regulations. It
        shall be the responsibility of the Escrow Agent to timely and properly
        prepare and deliver the necessary documentation for signature by all
        necessary parties and thereafter to cause the appropriate filing to
        occur.

                7.2.    Returns. For the purpose of Section 468B of the Code,
        and the regulations promulgated thereunder, the "administrator" shall be
        the Escrow Agent. The Escrow Agent shall timely and properly file all
        informational and other tax returns necessary or advisable with respect
        to the Settlement Fund (including without limitation the returns
        described in Treas. Reg. Sec. 1.468B-2(k)).

                7.3.    Taxes. All (i) taxes (including any estimated taxes,
        interest, penalties or additions to tax) arising with respect to the
        income earned by the Settlement Fund, including any taxes that may be
        imposed upon the Settlement Fund, Settling Defendants or Settling
        Defendants' Counsel with respect to any income earned by the Settlement
        Fund for any period during which the Settlement Fund does not qualify as
        a "qualified settlement fund" for federal or state income tax purposes
        ("Taxes"), and (ii) expenses and costs incurred in connection with the
        operation and implementation of this Section 7.3

                                       45



        (including, without limitation, expenses of tax attorneys and/or
        accountants and mailing and distribution costs and expenses relating to
        filing (or failing to file) the returns described in this Article 7
        ("Tax Expenses"), shall be paid out of the Settlement Fund. Settling
        Defendants and Settling Defendants' Counsel shall have no liability or
        responsibility for Taxes or Tax Expenses. The Escrow Agent hereby
        indemnifies and holds harmless each of the Settling Defendants and
        Settling Defendants' Counsel for any and all Taxes and Tax Expenses
        (including, without limitation, Taxes payable by reason of any such
        indemnification). Further, Taxes and Tax Expenses shall be treated as
        and considered to be, a cost of administration of the Settlement Fund
        and shall be timely paid by the Escrow Agent out of the Settlement Fund
        without prior order from the Federal Court and the Escrow Agent shall be
        obligated (notwithstanding anything herein to the contrary) to withhold
        from distribution to the Authorized Claimants any funds necessary to pay
        such amounts including the establishment of adequate reserves for any
        Taxes and Tax Expenses (as well as any amounts that may be required to
        be withheld under Treas. Reg. Sec. 1.468B-2(1)(2); neither Settling
        Defendants nor Settling Defendants' Counsel are responsible nor shall
        they have any liability therefore. The Settling Parties shall cooperate
        with the Escrow Agent, each other, and their tax attorneys and
        accountants to the extent reasonably necessary to carry out the
        provisions of this Article 7.

8.      PRELIMINARY ORDER AND SETTLEMENT HEARING

                8.1.    Application for Preliminary Order. Within five (5)
        business days after the execution and delivery of this Stipulation by
        all parties hereto, the Settling Parties shall submit this Stipulation
        together with its Exhibits to the Federal Court and shall apply for
        entry of an order, requesting, inter alia, the preliminary approval of
        the Settlement,

                                       46



        certification of relevant claims for settlement purposes, and approval
        for the mailing and publication of the Notices (the "Preliminary
        Order").

9.      ADMINISTRATION AND CALCULATION OF CLAIMS, FINAL AWARDS, AND SUPERVISION
        AND DISTRIBUTION OF SECURITIES SETTLEMENT FUND AND ERISA SETTLEMENT FUND

                9.1.    Administration of the Settlement Fund. The Claims
        Administrator, appointed and subject to such supervision and direction
        of the Federal Court, shall administer and calculate the claims
        submitted by or on behalf of Settling Plaintiffs and shall oversee
        distribution of the Settlement Fund to the Authorized Claimants or, as
        applicable, to the Plan for redistribution to the Authorized Claimants.

                9.2.    Distribution of the ERISA Settlement Fund. Distribution
        of the ERISA Settlement Fund shall be applied as follows:

                        (a)     to pay the Taxes and Tax Expenses described in
                Article 7 hereof to the extent allocable to the ERISA
                Settlement;

                        (b)     to pay Settling ERISA Plaintiffs' Counsel
                attorneys' fees and expenses, if and to the extent allowed by
                the Federal Court, and as otherwise provided in this
                Stipulation;

                        (c)     to pay all the costs and expenses of the Claims
                Administrator reasonably and actually incurred in connection
                with discharging its responsibilities in connection with the
                process of distributing the ERISA Settlement Fund to Authorized
                ERISA Claimants, and paying escrow fees and costs allocable to
                the ERISA Settlement Fund, if any;

                        (d)     to pay the named plaintiff in Kirkley v.
                Hanover, et al., Case No. H-03-1155, two thousand five hundred
                dollars ($2,500), if such award is approved by the Federal
                Court; and

                                       47



                        (e)     to distribute the ERISA Settlement Fund (after
                deducting costs and expenses allowed pursuant to Section 9.2(a),
                (b), (c), and (d)) to Authorized ERISA Claimants as allowed by
                the ERISA Plan of Allocation.

                9.3.    Distribution of the Securities Settlement Fund. The
        Securities Settlement Fund shall be applied as follows:

                        (a)     to pay the Taxes and Tax Expenses described in
                Article 7 hereof to the extent allocable to the Securities
                Settlement;

                        (b)     to pay Lead Counsel attorneys' fees and
                expenses, if and to the extent allowed by the Federal Court, and
                as otherwise provided in this Stipulation;

                        (c)     to pay all the costs and expenses reasonably and
                actually incurred in connection with providing Notice to and
                locating Securities Plaintiff Class, soliciting claims of
                Securities Plaintiff Class, assisting with the filing of claims,
                administering and distributing the Securities Settlement Fund to
                Authorized Securities Claimants, processing proofs of claim and
                release forms and paying escrow fees and costs allocable to the
                Securities Settlement Fund, if any; and

                        (d)     to distribute the Settlement Fund (after
                deducting costs and expenses allowed pursuant to Section 9.3(a),
                (b) and (c)) to Authorized Securities Claimants as allowed by
                the Securities Plan of Allocation.

                9.4.    Distribution of Remaining Balance of Securities
        Settlement Fund. The Securities Settlement Fund shall be distributed to
        the Authorized Claimants substantially in accordance with the Securities
        Plan of Allocation. However, if there is any balance remaining in the
        Securities Settlement Fund (whether by reason of tax refunds, uncashed
        checks or otherwise) after the later of (a) twenty four (24) months
        after the Effective Date

                                       48



        or (b) twelve (12) months after the cancellation or maturity of the
        Note, Lead Counsel shall reallocate such balance among the Authorized
        Securities Claimants in an equitable and economic fashion. Thereafter,
        any balance which still remains in the Securities Settlement Fund shall
        be donated to an appropriate non-profit organization or distributed as
        may be ordered by the Federal Court consistent with the terms of this
        Stipulation.

                9.5.    Responsibility of Administration. Settling Defendants'
        Counsel shall not have any responsibility for, interest in, or liability
        whatsoever with respect to, (i) the investment, distribution or
        administration of the Settlement Fund (or losses incurred as a result
        thereof), (ii) the determination or administration of the Securities
        Plan of Allocation or the ERISA Plan of Allocation, (iii) the
        solicitation or calculation of Proofs of Claim from any Authorized
        Claimant, or (iv) the payment or withholding of Taxes, or any losses
        incurred in connection with or by the Settlement Fund.

                9.6.    Release of Liability for Distributions. No Person shall
        have any claim against any Settling Party, their counsel or any of their
        Related Persons based on the distributions made in accordance with this
        Stipulation or further orders of the Federal Court.

                9.7.    Claims by Persons Who Are Both Settling Securities
        Plaintiffs and Settling ERISA Plaintiff Class Members. Settling ERISA
        Class members who by virtue of their holdings in the Plan are also
        Settling Securities Plaintiffs shall have submitted on their behalf by
        the Plan Proofs of Claims for such holdings in connection with both the
        Securities and ERISA Settlements. Distributions in response to such
        Proofs of Claim shall be as described in the Securities Plan of
        Allocation and the ERISA Plan of Allocation, respectively.

                                       49



                9.8.    Certain Obligations of the Plan, the Claims
        Administrator, and Hanover.

                        (a)     Submission of Information to Claims
                Administrator. The Plan shall timely submit to the Claims
                Administrator all available information concerning the holdings
                of and transactions in Hanover Securities in the Plan by members
                of the Settling ERISA Plaintiff Class as may be required in
                connection with submission of a Proof of Claim for participation
                in the Securities Settlement and the ERISA Settlement. Such
                submissions shall be deemed for all purposes to be Proofs of
                Claim submitted by the Settling ERISA Plaintiff Class members
                with respect to such holdings for participation in the
                Securities Settlement and the ERISA Settlement.

                        (b)     Actions by Claims Administrator. The Claims
                Administrator will process the information provided by the Plan
                as described in Section 9.8(a) above and calculate the
                distributions in cash and Hanover Common Stock due to each
                member of the Settling ERISA Plaintiff Class from the ERISA
                Settlement Fund and the Securities Settlement Fund, all
                deductions from such funds required under this Stipulation
                having been made. The Claims Administrator will provide the
                results of such calculations to the Plan and will transfer or
                cause to be transferred to the Plan an aggregate amount of cash
                and Hanover Common Stock equal to the sum of cash and Hanover
                Common Stock that it has calculated are due to each of the
                Settling ERISA Class Members.

                        (c)     Distribution of Settlement Proceeds. All
                proceeds from the ERISA Settlement and the Securities Settlement
                distributed by or at the direction of the Claims Administrator
                to the Plan pursuant to Section 9.8(b) above shall be

                                       50



                redistributed by the Plan to the members of the Settling ERISA
                Plaintiff Class on a pass-through basis within thirty (30) days
                of the later of the receipt of the funds and the information
                specifying the distribution to be made to each member of the
                Settling ERISA Plaintiff Class. Such redistribution shall
                correspond in amount and kind with the calculations provided by
                the Claims Administrator. The Plan shall make all
                redistributions of proceeds of the ERISA Settlement that it
                receives directly to the Plan accounts of members of the
                Settling ERISA Plaintiff Class who have such accounts or, to the
                extent and in the manner permitted by law, to any other account
                which such members may specify. The Plan and/or Hanover shall
                cause to be discharged all of the Plan's reporting obligations
                under federal or state tax laws or ERISA in respect of its
                redistribution of such proceeds. The Plan shall bear the costs
                and expenses attributable to discharging all of its obligations
                under this Stipulation. Any proceeds that cannot be
                redistributed by the Plan upon the exercise of reasonable
                efforts or as otherwise required by law shall be converted into
                cash and, subject to the requirements of law, shall be used
                first to pay costs associated with the redistribution of
                proceeds and thereafter shall become the property of the Plan.
                Any unrecovered costs to the Plan of effecting the
                redistribution of proceeds shall be borne by Hanover.

                        (d)     Implementation of Plan's Obligations. Hanover
                will cause the Plan to undertake the obligations imposed on it
                hereunder.

                                       51



10.     TERMINATION

                10.1.   Termination of the Stipulation. In the event that the
        Stipulation is terminated or cancelled, for any reason, within ten (10)
        business days after written notification of such event is sent by
        Hanover to the Escrow Agent, (a) the Securities Settlement Cash Fund
        (including accrued interest), net of any reasonable and actual costs
        incurred for notice expenses, shall be refunded by the Escrow Agent to
        Hanover, (b) the Note (if issued) shall be cancelled and returned by the
        Escrow Agent to Hanover, (c) the Hanover Settlement Shares (if
        previously delivered) shall be returned by the Escrow Agent to Hanover,
        and (d) the GKH Settlement Shares (if previously delivered) shall be
        returned by the Escrow Agent to GKH. At the request of Hanover, the
        Escrow Agent or its designee shall apply for any Tax refund owed to the
        Securities Settlement Cash Fund and pay the proceeds, after deduction of
        any fees or expenses incurred in connection with such application(s) for
        refund, to Hanover.

                10.2.   Restoration in Event of Termination. In the event that
        the Settlement is terminated or cancelled, for any reason, the Settling
        Parties shall be restored to their respective positions in the Settling
        Actions as of May 11, 2003. In such event, the terms and provisions of
        this Stipulation shall have no further force and effect with respect to
        the Settling Parties and shall not be used in any of the Actions, and
        any judgment or order entered by the Federal Court in accordance with
        the terms of the Stipulation shall be treated as vacated, nunc pro tunc.
        No order of the Federal Court or modification or reversal on appeal of
        any order of the Federal Court concerning any Plan of Allocation or the
        amount of any attorneys' fee and expense award approved by the Federal
        Court shall constitute grounds for cancellation or termination of the
        Stipulation.

                                       52



                10.3.   Partial Settlement. Without limiting the generality of
        Sections 10.1 and 10.2, if one or more of the Securities Settlement,
        ERISA Settlement, or Derivative Settlement is or are terminated as
        contemplated by this Stipulation (each, a "Non-Settled Action"), but any
        of such settlements is consummated as contemplated by this Stipulation,
        then (a) that portion of the Settlement Fund, less any reasonable and
        actual cost of Notice, as relates to the Non-Settled Actions shall be
        refunded and returned in a like manner as contemplated by Section 10.1
        above and (b) the Settling Parties in the Non-Settled Actions shall be
        restored to their respective positions in the Non-Settled Actions in a
        like manner as contemplated by Section 10.2 above.

11.     MISCELLANEOUS PROVISIONS

                11.1.   Cooperation of Settling Parties. The Settling Parties
        (a) acknowledge that it is their intent to consummate the Settlement and
        (b) agree to cooperate to the extent reasonably necessary to effectuate
        and implement all terms and conditions of this Stipulation and to
        exercise their commercially reasonable efforts to accomplish the
        foregoing terms and conditions of this Stipulation and to consummate the
        transactions contemplated hereby.

                11.2.   Acknowledgment of Adequate Consideration. The Settling
        Parties acknowledge, represent and warrant to each other that the mutual
        releases and payments hereunder are such that each of the Settling
        Parties is to receive adequate consideration for the consideration
        given.

                11.3.   No Admissions. Neither this Stipulation nor the
        Settlement, nor any act performed or document executed pursuant to or in
        furtherance of this Stipulation or the Settlement (a) is or may be
        deemed to be or may be used as an admission of, or evidence

                                       53



        of, the validity of any Released Claim, or of any wrongdoing or
        liability of the Settling Defendants or any of their Related Persons;
        (b) is or may be deemed to be or may be used as an admission of, or
        evidence of, any fault or omission of any of the Settling Defendants or
        any of their Related Persons in any civil, criminal or administrative
        proceeding in any court, administrative agency or other tribunal; or (c)
        is or may be alleged or mentioned so as to contravene clause (a) above
        in any litigation or other action unrelated to the enforcement of this
        Stipulation. Settling Defendants may file this Stipulation or any
        judgment or order of the Federal Court related hereto in any action that
        may be brought against them in order to support a defense or
        counterclaim based on principles of res judicata, collateral estoppel,
        release, good faith settlement, judgment bar or reduction or any other
        theory of claim preclusion or issue preclusion or similar defense or
        counterclaim. The Order and Final Judgment in the Securities Settlement,
        the Derivative Settlement, and the ERISA Settlement will contain a
        statement that, during the course of the litigation, the Settling
        Parties and the Settling Parties' Counsel complied with the requirements
        of Federal Rule of Civil Procedure 11.

                11.4.   Confidentiality Agreements. All agreements made and
        orders entered during the course of the negotiations relating to the
        confidentiality of information shall survive this Stipulation and the
        Settlement.

                11.5.   Exhibits. All of the Exhibits to this Stipulation are
        material and integral parts hereof and are fully incorporated herein by
        this reference.

                11.6.   Costs. Except as otherwise expressly provided herein,
        the Settling Parties shall bear their own costs.

                                       54



                11.7.   Entire Agreement. This Stipulation, the May 2003
        Supplemental Agreement between GKH and Hanover, the Supplemental
        Securities Agreement, the Escrow Agreement, and all documents executed
        pursuant hereto constitute the entire agreement between the parties with
        respect to the settlement of the Actions and supersede any and all prior
        negotiations, discussions, agreements or undertakings, whether oral or
        written, with respect to the settlement of the Actions including, but
        not limited to, the MOU.

                11.8.   Counterparts. The Stipulation may be executed in one or
        more counterparts and all such counterparts together shall be deemed to
        be one and the same instrument.

                11.9.   Binding Effect. This Stipulation shall be binding upon,
        and inure to the benefit of, the Released Securities Parties, the
        Released Derivative Parties, the Released ERISA Parties, the Settling
        Parties and each of their respective Related Persons. This Stipulation
        is not intended, and shall not be construed, to create rights in or
        confer benefits on any other Persons, and there shall not be any third
        party beneficiaries hereto except as expressly provided hereby with
        respect to such aforementioned Persons who are not parties hereto.

                11.10.  Judicial Enforcement. The Federal Court shall retain
        jurisdiction with respect to implementation and enforcement of the terms
        of the Stipulation and the Settlement, and the Settling Parties submit
        to the jurisdiction of the Federal Court for purposes of implementing
        and enforcing the terms of the Stipulation and Settlement.

                11.11.  Choice of Law. This Stipulation shall be governed by the
        laws of the State of Texas, excluding its choice of law provisions.

                                       55



                11.12.  Warrant of Authority. Each counsel or other Person
        executing the Stipulation or any of its Exhibits on behalf of any party
        hereto hereby warrants that such Person has the full authority to do so.

                11.13.  Waiver of Breach. The Settling Parties may not waive or
        vary any right hereunder except by an express written waiver or
        variation. Any failure to exercise or any delay in exercising any of
        such rights, or any partial or defective exercise of such rights, shall
        not operate as a waiver or variation of that or any other such right.
        The waiver by one Settling Party of any breach of this Stipulation by
        another Settling Party shall not be deemed a waiver of any other prior
        or subsequent breach of this Stipulation.

                11.14.  Fair Construction. This Stipulation shall not be
        construed more strictly against one party than another merely by virtue
        of the fact that it, or any part of it, may have been prepared by
        counsel for one of the parties, it being recognized that it is the
        result of arm's-length negotiations between the parties and all parties
        have contributed substantially and materially to the preparation of this
        Stipulation.

                11.15.  No Assignment of Claims. Each member of the Settling
        Securities Plaintiff Class and the Settling ERISA Plaintiff Class, and
        each Settling Derivative Plaintiff hereby represents and warrants that
        it has not assigned any rights, claims or causes of action that were
        asserted or could have been asserted in connection with, under, or
        arising out of any of the claims being settled or released herein,
        provided, however, that nothing contained in this Stipulation should
        prevent any member of the Settling Securities Plaintiff Class from
        assigning his, her, or its right to distributions from the Settlement
        Fund.

                                       56



                11.16.  Totality of Releases and Bar Orders. For the avoidance
        of doubt, the Settling Parties hereby acknowledge and agree that, if the
        Settlement is consummated in all material respects, (i) the Securities
        Release, Derivative Release and ERISA Release shall operate together
        with duplication and without exclusion of any Released Claim and (ii)
        the bar orders contemplated by Sections 2.14, 3.10 and 4.10 shall
        operate together with duplication and without exclusion of any matter
        discussed therein.

                11.17.  Tolling Agreements Void. The Tolling Agreements shall be
        void upon the Effective Date of the Securities Settlement.

                11.18.  No Compensation Necessary as a Result of Losses. The
        Settling Plaintiffs and the Settling Plaintiffs' Counsel acknowledge
        that the Settlement Fund may suffer losses as a result of investment of
        the Securities Settlement Cash Fund or fluctuations in value of the
        Settlement Shares (including fluctuations and resulting losses before
        the Settlement Shares are contributed to the Securities Settlement Stock
        Fund), or the Note, and they agree that none of the Settling Defendants
        or the Settling Defendants' Counsel is liable for or has any obligation
        to compensate for, or restore to the Settlement Fund or the Settling
        Plaintiffs or the Settling Plaintiffs' Counsel, any such losses or value
        fluctuations, and further agree that any such losses or fluctuations in
        value shall be at the risk of the Settling Plaintiffs and the Settling
        Plaintiffs' Counsel.

                11.19.  Assignment of Agreement. Milberg Weiss shall not assign
        any of its rights or obligations under this Stipulation (including any
        rights and obligations as Lead Counsel or Escrow Agent) without the
        prior written consent of Hanover, and any attempted transfer or
        assignment in violation of this provision shall be null and void;
        provided, however, that Milberg Weiss may, without consent, but with
        prior written

                                       57



        notice to Hanover, assign any such rights or obligations to a single
        entity formed as a result of a reorganization of Milberg Weiss as long
        as such assignee assumes all of the obligations of Milberg Weiss under
        this Stipulation and Milberg Weiss and each of its partners, as Milberg
        Weiss and its partners existed on May 12, 2003, are jointly and
        severally liable with the assignee for all such obligations.

                11.20.  Facsimile Signatures. Any signature to this Stipulation,
        to the extent signed and delivered by means of a facsimile machine,
        shall be treated in all manners and respects as an original signature
        and shall be considered to have the same binding legal effect as if it
        were the original signed version thereof delivered in person. At the
        request of a Settling Party to this Stipulation, any other Settling
        Party to this Stipulation so executing and delivering this document by
        means of a facsimile machine shall reexecute original forms thereof and
        deliver them to the requesting party. No party to this Stipulation shall
        raise the use of a facsimile machine to deliver a signature or the fact
        that any signature or agreement was transmitted or communicated through
        the use of a facsimile machine as a defense to the formation or
        enforceability of this Stipulation and each such Person forever waives
        any such defense.

                                       58



                The Settling Parties have caused this Stipulation to be duly
        executed and delivered by their counsel of record:

/s/ Kevin T. Abikoff                       Date: 10/13/03
- --------------------
Kevin T. Abikoff
HUGHES HUBBARD & REED LLP
1775 I Street, N.W.
Washington, D.C.  20006-2401
Telephone:  202-721-4600
Facsimile:  202-721-4646

Counsel for Defendant Hanover Compressor
Company

/s/ Darren J. Robbins                      Date: 10/22/03
- ---------------------
Darren J. Robbins
Randall Steinmeyer
Amber L. Eck
MILBERG WEISS BERSHAD HYNES & LERACH LLP
401 B Street, Suite 1700
San Diego, CA  92101
Telephone:  619-231-1058
Facsimile:  619-231-7423

Counsel for Lead Plaintiffs Pirelli Armstrong Tire,
Retiree Medical Benefits Trust, Plumbers &
Steamfitters, Local 137 Pension Fund, O. Bryant
Lewis, 720 Capital Management, LLC and
Specialists DPM

                                       59



/s/ Richard B. Brualdi                     Date: 10/23/03
- -----------------------
Richard B. Brualdi
Kevin T. O'Brien
THE BRUALDI LAW FIRM
29 Broadway, Suite 1515
New York, New York 10006
Telephone: 212-952-0602
Facsimile: 212-785-1618

Counsel for Plaintiff Harbor Finance Partners

/s/ Paul T. Warner                         Date: 10/22/03
- -------------------
Paul T. Warner
REICH & BINSTOCK
4265 San Felipe, Suite 1000
Houston, TX 77027
Telephone: 713-622-7271
Facsimile: 713-623-8724

Counsel for Plaintiffs Roger Koch, Henry Carranza and William Steves

/s/ David M. Goldstein                     Date: 10/23/03
- -----------------------
David M. Goldstein
MARICIC & GOLDSTEIN, LLP
10535 Foothill Blvd., Suite 300
Rancho Cucamongo, CA  91729
Telephone: 909-945-9549
Facsimile: 909-980-5525

Counsel for Plaintiff William Steves

/s/ Neil Rothstein                         Date: 10/22/03
- --------------------
Neil Rothstein
SCOTT & SCOTT, LLC
P.O. Box 192
108 Norwich Avenue
Colchester, CT 06415
Telephone: 1-800-404-7770
Facsimile: 1-860-537-4432

                                       60



Counsel for Plaintiff
Henry Carranza

/s/ Brian J. Robbins                       Date: 10/22/03
- ---------------------
Brian J. Robbins
ROBBINS UMEDA & FINK, LLP
1010 Second Avenue, Suite 2360
San Diego, CA 92101
Telephone: 619-525-3990
Facsimile: 619-525-3991

Counsel for Plaintiff
Roger Koch

/s/ Robert Schubert                        Date: 10/22/03
- --------------------
Robert Schubert
SCHUBERT & REED LLP
Two Embarcadero Center
Suite 1660
San Francisco, CA  94111
Telephone: 415-788-4220
Facsimile: 415-788-0161

Counsel for Plaintiff
John B. Hensley, Jr.


/s/ John G. Emerson                        Date: 10/23/03
- -------------------
John G. Emerson
Scott E. Poynter
EMERSON POYNTER LLP
P.O Box 164810
Little Rock, AR 72216-4810
Little Rock, AR 72202-5094
Telephone: 501-907-2555
Facsimile: 501-907-2556

Counsel for Plaintiff
Coffelt Family LLC

                                       61



/s/ James Baskin                           Date: 10/22/03
- ----------------
James Baskin
BASKIN LAW FIRM
300 W. 6th Street, Suite 1950
Austin, TX  78701
Telephone: 512-381-6300
Facsimile: 512-322-9280

Counsel for Plaintiff
Henry Duncan Kirkley

/s/ Thomas Bilek                           Date: 10/23/03
- ------------------
Thomas Bilek
HOEFFNER & BILEK, L.L.P.
440 Louisiana Ste., 720
Houston, TX  77002
Telephone: 713-227-7720
Facsimile: 713-227-9404

Counsel for Plaintiffs
Ann Angleopoulos and Joyce Freeman

/s/ Robert B. Weiser                       Date: 10/23/03
- -----------------------
Andrew L. Barroway
Robert B. Weiser
Eric L. Zager
SCHIFFRIN & BARROWAY
Three Bala Plaza East, Suite 400
Bala Cynwyd, PA  19004
Telephone: 610-667-7706
Facsimile: 610-667-7056

Counsel for Plaintiff
Ann Angleopoulos

                                       62



/s/ Evan Smith                             Date: 10/23/03
- ----------------
Evan Smith
BRODSKY & SMITH, LLC
240 Mineola Boulevard
Mineola, New York 11501
Telephone: 516-741-4977
Facsimile: 610-667-9029

Counsel for Plaintiff
Joyce Freeman

/s/ Pamela G. Smith                        Date: 10/23/03
- -------------------
Pamela G. Smith
David H Kistenbroker
KATTEN MUCHIN ZAVIS &
ROSENMAN
525 West Monroe, Suite 1600
Chicago, IL 60661-3693
Telephone: 312-902-5200
Facsimile: 312-577-4770

Counsel for Defendant William S. Goldberg

/s/ Edward B. Horahan, III                 Date: 10/23/03
- ---------------------------
Edward B. Horahan, III
DECHERT LLP
1775 I Street, N.W.
Washington, DC 20006-2401
Telephone: 202-261-3300
Facsimile: 202-261-3333

Counsel for Defendant Charles D. Erwin

                                       63



/s/ Eric J.R. Nichols                      Date: 10/23/03
- ----------------------
Eric J.R. Nichols
BECK REDDEN & SECREST
One Houston Center
1221 McKinney St., Suite 4500
Houston, TX 77010-2010
Telephone: 713-951-3701
Facsimile: 713-951-3720

Counsel for Defendant Michael J. McGhan

/s/ Craig Smyser                           Date: 10/22/03
- ------------------
Craig Smyser

SMYSER KAPLAN & VESELKA, L.L.P.
Bank of America Center
700 Louisiana Street, Suite 2300
Houston, TX 77002
Telephone: 713-221-2300
Facsimile: 713-221-2320

Counsel for Defendants Melvyn N. Klein, Ted
Collins, Jr., Robert R. Furgason,
Rene J. Huck and Alvin V. Shoemaker

/s/ Harvey G. Brown, Jr.                   Date: 10/24/03
- ------------------------
Harvey G. Brown, Jr.
WRIGHT & BROWN, LLP
Three Riverway, Suite 1660
Houston, TX 77057
Telephone: 713-572-4321
Facsimile: 713-572-4320

Counsel for Karen L. O'Connor  and the Estate of Michael A. O'Connor,
Deceased

                                       64



/s/ Steven J. Rothschild                   Date: 10/23/03
- -------------------------
Steven J. Rothschild
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP
One Rodney Square, PO Box 636
Wilmington, DE 19801
Telephone: 302-651-3000
Facsimile: 302-651-3001

Counsel for Defendants Victor E. Grijalva, Gordon
T. Hall and I. Jon Brumley

/s/ Richard A. Rosen                       Date: 10/23/03
- --------------------
Richard A. Rosen
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
1285 Avenue of the Americas
New York, NY 10019-6064
Telephone: 212-373-3000
Facsimile: 212-757-3990

Counsel for GKH

                                       65

EX-10.2

                                                                    EXHIBIT 10.2

                           SECOND AMENDED AND RESTATED
                           MEMORANDUM OF UNDERSTANDING

        The Settling Securities Parties, the Settling ERISA Parties, and the
Settling Derivative Parties (collectively, the "Settling Parties"), have reached
an agreement in principle as set forth in this Second Amended and Restated
Memorandum of Understanding (the "Memorandum") providing for the settlement and
dismissal with prejudice of the claims asserted in the Derivative Actions, the
ERISA Actions, and the Consolidated Securities Action, on the terms and subject
to the conditions set forth below (the "Settlement").1

                                    RECITALS

        WHEREAS, on and after February 4, 2002, securities Class Actions were
filed by the plaintiffs named herein on behalf of themselves and all others
similarly situated in the United States District Court for the Southern District
of Texas (the "Federal Court"), entitled Pirelli Armstrong Tire Corp. Retiree
Medical Benefits Trust, et al. v. Hanover Compressor Company, et al., Case No.
H-02-0410, McBride v. Hanover Compressor, Case No. H-02-0431, Koch v. Hanover
Compressor, Case No. H-02-0441, Schneider v. Hanover Compressor, Case No.
H-02-0491, Goldstein v. Hanover Compressor, Case No. H-02-0526, Noyes v. Hanover
Compressor, Case No. H-02-0574, Rocha v. Hanover Compressor, Case No. H-02-0594,
Peck v. Hanover Compressor, Case No. H-02-0627, Mueller v. Hanover Compressor,
Case No. H-02-0652, Langhoff v. Hanover Compressor, Case No. H-02-0764, Fox v.
Hanover Compressor, Case No. H-02-0815, Rosen v. Goldberg, Case No. H-02-0959,
Detectives Endowment v. Hanover Compressor, Case No. H-02-1016, Montag v.
Hanover Compressor, Case No. H-02-1030, and Anderson v. Hanover Compressor, Case
No. H-02-2306 (collectively, the "Securities Actions");

        WHEREAS, by Order dated March 28, 2002, the Federal Court consolidated
the Securities Actions under the caption Pirelli Armstrong Tire Corp. Retiree
Medical Benefits Trust, et al. v. Hanover Compressor Company, et al. (the
"Consolidated Securities Action");

        WHEREAS, on and after April 10, 2002, derivative actions were filed in
or removed to the Federal Court, including the following actions: Koch v.
O'Connor, et al., Case No. H-02-1332, Carranza v. O'Connor, et al., Case No.
H-02-1430, Steves v. O'Connor, et al., Case No. H-02-1527, Hensley v. McGann, et
al., Case No. H-02-2994, Harbor Finance Partners v. McGhan, et al., Case No.
H-02-0761, (collectively, the "Federal Derivative Actions"), as well as in the
Delaware Chancery Court on February 15, 2002, Coffelt Family, LLC v. O'Connor,
et al., No. CA 19410 (the "State Derivative

- ----------
1.   All capitalized terms not otherwise defined shall have the meaning set
     forth in Section I below.

                                        1



Action"), (collectively, the plaintiffs named in the State Derivative Action and
the Federal Derivative Actions are the "Derivative Plaintiffs"), (collectively,
the State Derivative Action and the Federal Derivative Actions are the
"Derivative Actions" or the "Settling Derivative Actions");

        WHEREAS, on August 19, 2002 and August 26, 2002, the Federal Derivative
Actions were consolidated into the Harbor Finance Partners action;

        WHEREAS, by Order dated January 6, 2003, the Federal Court appointed
Pirelli Armstrong Tire, Retiree Medical Benefits Trust, Plumbers & Steamfitters,
Local 137 Pension Fund, O. Bryant Lewis, 720 Capital Management, LLC and
Specialists DPM, Lead Plaintiffs and appointed Milberg Weiss Bershad Hynes &
Lerach LLP, Lead Counsel, in the Consolidated Securities Action;

        WHEREAS, on or after March 26, 2003, actions alleging violations of the
Employee Retirement Income Security Act ("ERISA") were filed by and/or on behalf
of the plaintiffs named herein (the "ERISA Plaintiffs") on behalf of themselves
and all other similarly situated, in the Federal Court, including Kirkley v.
Hanover, et al., Case No. H-03-1155, Angleopoulos v. Hanover Compressor, et al.,
Case No. H-03-1064, and Freeman v. Hanover Compressor, et al., Case No.
H-3-1095; (collectively, the "ERISA Actions");

        WHEREAS, on May 12, 2003, Settling Defendants and certain of the
Settling Plaintiffs entered into a Memorandum of Understanding to resolve all
claims that have been or could be asserted in the Consolidated Securities
Action, the Derivative Actions, and the ERISA Actions (collectively, the
"Actions");

        WHEREAS, on July 18, 2003, Settling Defendants and certain of the
Settling Plaintiffs entered into a First Amended Memorandum of Understanding
which, on the terms set forth therein, included the plaintiffs in the
Angleopoulos and Freeman actions;

        WHEREAS, by Order dated August 1, 2003, the Federal Court granted an
Order consolidating the ERISA Actions into the Consolidated Securities Action
for purposes of settlement;

        WHEREAS, the Settling Parties have engaged in substantial arm's length
negotiations in an effort to resolve all claims that have been or could be
asserted in the Actions, including conducting numerous meetings and telephone
conferences where the terms of the agreements detailed herein were extensively
debated and negotiated;

        WHEREAS, the Settling Securities Defendants, defined herein, the
Settling Derivative Defendants, defined herein, and the Settling ERISA
Defendants, defined herein, have denied and continue to deny that they have
liability as a result of any and all allegations contained in the Actions and
that they are entering into the Settlement in order to eliminate the burden,
distractions, expense and uncertainty of further litigation; and

                                        2



        WHEREAS, the Settling Parties and their counsel believe that the terms
and conditions of this Memorandum are fair, reasonable and adequate and are the
result of arm's length negotiations between the Settling Parties;

        NOW, THEREFORE, in consideration of the promises and agreements,
covenants, representations, and warranties set forth herein, intending to be
legally bound:

        THE SETTLING PARTIES STIPULATE AND AGREE AS FOLLOWS:

I.      DEFINITIONS

        The following additional definitions shall apply in this Memorandum:

                (a)     "Actions" means the Consolidated Securities Action, the
Derivative Actions and the ERISA Actions;

                (b)     "Effective Date" means the date of completion of the
following: (i) Court approval of the dismissal of the claims that have been or
could be asserted in each of the Actions in all material respects AND EITHER
(ii) expiration of the time to appeal or otherwise seek review of the Order and
Final Judgment which approves the Settlement without any appeal having been
taken or review sought; OR (iii) if an appeal is taken or review sought, the
expiration of five days after an appeal or review shall have been finally
determined by the highest court before which appeal or review is sought and
which upholds the terms of such appealed settlement and/or an Order and Final
Judgment and is not subject to further judicial review;

                (c)     "GKH" means GKH Partners, L.P., GKH Investments, L.P.,
GKH Private Limited, HGW Associates, L.P., DWL Lumber Corp. and JAKK Holding
Corp., each of their respective present and former parents, subsidiaries and
affiliates, the present and former trustees, directors, officers, shareholders,
general partners, limited partners, employees, agents, attorneys and
representatives of each of the foregoing and the predecessors, successors and
assigns of each of the foregoing;

                (d)     "Hanover" or the "Company" means Hanover Compressor
Company and its subsidiaries and affiliates, agents, partnerships, joint
ventures and their assigns and successors in interest;

                (e)     "Lead Plaintiffs' Counsel" means Milberg Weiss Bershad
Hynes & Lerach LLP;

                (f)     "Plan" means the Hanover Companies Retirement Savings
Plan.

                (g)     "Released Defendants' Counsel" means counsel for each of
the Settling Defendants and each of their respective partners, associates,
experts, agents, insurers, advisors, successors and assigns;

                (h)     "Released Derivative Parties" means Released Defendants'
Counsel, Released Plaintiffs' Counsel, the Derivative Plaintiffs, the Derivative

                                        3



Defendants, GKH, and each of their parents, subsidiaries or affiliates, and all
of their respective present or former directors, officers, underwriters,
fiduciaries, trustees, employees, agents, insurers, attorneys and advisors, and
each of their successors, heirs, assigns, executors, personal representatives
and immediate families;

                (i)     "Released ERISA Parties" means Released Defendants'
Counsel, Released Plaintiffs' Counsel, the ERISA Plaintiffs, the ERISA
Defendants, GKH and each of their parents, subsidiaries or affiliates, and all
of their respective present or former directors, officers, underwriters,
fiduciaries, trustees, employees, agents, insurers, attorneys and advisors, and
each of their successors, heirs, assigns, executors, personal representatives
and immediate families;

                (j)     "Released Parties" means: Released Plaintiffs' Counsel,
Released Defendants' Counsel, the Settling Securities Plaintiffs, the Settling
Derivative Plaintiffs, the Settling ERISA Plaintiffs, the Settling Securities
Defendants, the Settling Derivative Defendants, the Settling ERISA Defendants,
GKH, and Schlumberger Limited, and each of their parents, subsidiaries or
affiliates, and all of their respective present or former directors, officers,
employees, agents, fiduciaries, trustees, insurers, underwriters, attorneys and
advisors, as well as all of their successors, heirs, assigns, executors,
personal representatives and immediate families as well as the Plan, but does
not include PricewaterhouseCoopers, LLP;

                (k)     "Released Plaintiffs' Counsel" means counsel for each of
the Settling Plaintiffs, and each of their respective partners, associates,
experts, agents, insurers, attorneys, advisors, successors and assigns;

                (1)     "Released Securities Parties" means Released Defendants'
Counsel, Released Plaintiffs' Counsel, the Settling Securities Plaintiffs, the
Settling Securities Defendants, Schlumberger Limited, and each of their parents,
subsidiaries or affiliates, and all of their respective present or former
directors, officers, underwriters, fiduciaries, trustees, employees, agents,
insurers, attorneys and advisors, and each of their successors, heirs, assigns,
executors, personal representatives and immediate families;

                (m)     "Settling Defendants" means the defendants in the
Consolidated Securities Action, the defendants in the Derivative Actions, and
the defendants in the ERISA Actions.

                (n)     "Settling Derivative Defendants" means Michael A.
O'Connor, William S. Goldberg, Melvyn N. Klein, Michael J. McGhan, Ted Collins,
Jr., Robert R. Furgason, Rene J. Huck, Alvin V. Shoemaker, Victor E. Grijalva,
Gordon T. Hall, I. Jon Brumley, Charles D. Erwin and Hanover;

                (o)     "Settling Derivative Parties" means the Settling
Derivative Plaintiffs and the Settling Derivative Defendants;

                (p)     "Settling Derivative Plaintiffs" means the Derivative
Plaintiffs;

                                        4



                (q)     "Settling ERISA Defendants" means Hanover, Michael J.
McGhan, William S. Goldberg, Chad C. Deaton, Michael A. O'Connor and all Hanover
officers, directors or employees who may be deemed to be a fiduciary with
respect to the Plan;

                (r)     "Settling ERISA Parties" means the Plan, the Settling
ERISA Plaintiffs and the Settling ERISA Defendants;

                (s)     "Settling ERISA Plaintiffs" means the ERISA Plaintiffs
and the Settling ERISA Plaintiff Class;

                (t)     "Settling ERISA Plaintiff Class" means all current and
former employees who are or were participants in the Plan and all persons who
are or were beneficiaries of the Plan, and who at any time between the dates of
May 4, 1999 and December 23, 2002 (the "ERISA Class Period"), purchased and/or
held Hanover securities in their accounts in the Plan;

                (u)     "Settling Parties" means the Settling Securities
Parties, the Settling Derivative Parties and the Settling ERISA Parties;

                (v)     "Settling Plaintiffs" means the Settling Securities
Plaintiffs, the Settling Derivative Plaintiffs, and the Settling ERISA
Plaintiffs;

                (w)     "Settling Securities Defendants" means Hanover, Michael
J. McGhan, William S. Goldberg, Michael A. O'Connor, Charles D. Erwin and GKH;

                (x)     "Settling Securities Parties" means the Settling
Securities Plaintiffs and the Settling Securities Defendants;

                (y)     "Settling Securities Plaintiffs" means the Lead
Plaintiffs Pirelli Armstrong Tire Corp. Retiree Medical Benefits Trust, Plumbers
& Steamfitters Local 137 Pension Fund, O. Bryant Lewis, 720 Capital Management
LLC and Specialists DPM and the Settling Securities Plaintiff Class;

                (z)     "Settling Securities Plaintiff Class" means all persons
or entities who purchased the equity or debt securities of Hanover or entities
affiliated therewith (collectively, the "Hanover Securities"), between May 4,
1999 and December 23, 2002 (the "Class Period"). Excluded from the Settling
Securities Plaintiff Class are those persons who were officers and/or directors
of Hanover during the Class Period as well as the Settling Securities
Defendants, members of their immediate families, their affiliates and those
members of the Settling Securities Plaintiff Class that timely and validly
exclude themselves from the Settling Securities Plaintiff Class. Also excluded
from the Settling Securities Plaintiff Class are Schlumberger Limited and GKH
and their subsidiaries.

                                        5



II.     SETTLEMENT TERMS FOR THE CONSOLIDATED SECURITIES ACTION

                (a)     Securities Settlement Agreement. The Settling Securities
Parties shall use all reasonable efforts, acting in good faith, to agree upon,
execute, and move the Federal Court for preliminary approval of a mutually
agreeable definitive settlement agreement and such other documentation as may be
required in order to obtain final approval of the settlement of the claims that
have been or could be asserted by the members of the Settling Securities
Plaintiff Class against the Settling Securities Defendants (the "Securities
Settlement") by the Federal Court within 45 days (45) of execution of this
Memorandum (the "Securities Settlement Agreement"). The terms of the Securities
Settlement Agreement shall be consistent with the terms of this Memorandum and
shall provide:

                        (i)     that the Settling Securities Defendants have
denied, and continue to deny that they have liability as a result of any and all
allegations contained in the Consolidated Securities Action and that they are
entering into the Settlement in order to eliminate the burden, distraction,
expense and uncertainty of further litigation;

                        (ii)    that GKH has entered into the Securities
Settlement and has agreed to contribute 2,495,000 shares of Hanover common stock
to settle all potential liability it might have under the Securities Act of 1933
and has agreed to contribute an additional 5,000 shares of Hanover common stock
to settle any and all remaining claims in the Actions;

                        (iii)   for the creation, and presentation to the
Federal Court for approval, of an appropriate form of notice, proof of claim,
and related materials;

                        (iv)    for the creation of the Securities Settlement
Fund, pursuant to the terms of paragraph (c) below;

                        (v)     for the implementation of the various corporate
governance changes detailed in Exhibit A attached hereto, which changes were the
subject of substantial negotiation by and among the Settling Parties and their
counsel;

                        (vi)    for the calculation and payment of allowable
claims;

                        (vii)   for the termination of the Consolidated
Securities Action consistent with the terms set forth below;

                        (viii)  for the release of claims against the Released
Securities Parties, pursuant to the terms set forth below;

                        (ix)    for the requirements and procedures for notice
to members of the Settling Securities Plaintiff Class and requirements and
procedures for the submission of proofs of claim, the calculation of allowable
claims, the appropriate allocation among members of the Class, the plan of
distribution, the submission of

                                        6



members of the Settling Securities Plaintiff Class to the jurisdiction of the
Federal Court for purposes of resolving disputed claims, and summary resolution,
or disputed claims;

                        (x)     for such other matters that are customarily
included in stipulations governing the settlement of securities class actions;
and

                        (xi)    that the Settling Securities Plaintiffs
expressly warrant that, in entering into the Settlement, they relied solely upon
their own knowledge and investigation (to include the knowledge and
investigation of counsel), and not upon any promise, representation, warranty,
or other statement by the Settling Securities Defendants not expressly contained
in this Memorandum or the Securities Settlement Agreement itself.

                (b)     Released Claims. The Securities Settlement Agreement
shall contain a full and general release to all Released Securities Parties,
except as to those claims that have been or could be asserted by the Settling
Securities Plaintiffs or members of the Settling Securities Plaintiff Class
against PricewaterhouseCoopers LLP, including the claims asserted in the January
24, 2003 complaint captioned Plumbers & Steamfitters, Local 137 Pension Fund and
John Petti v. PricewaterhouseCoopers, LLP, Case No. H-03-0300. The releases set
forth in the Securities Settlement Agreement shall cover all claims both known
and unknown (except as to those claims asserted against PricewaterhouseCoopers),
with the Settling Securities Parties agreeing to waive the benefits of Section
1542 of the California Civil Code (or any law of any state or territory of the
United States, or principle of common law that is similar, comparable or
equivalent to Section 1542 of the California Civil Code) which provides:

        A general release does not extend to claims which the creditor does not
        know or suspect to exist in his favor at the time of executing the
        release, which if known by him must have materially affected his
        settlement with the debtor.

                (c)     Securities Settlement Fund. In full and final settlement
of all claims asserted and all claims that could have been asserted against the
Settling Securities Defendants in the Consolidated Securities Action, the
Securities Settlement Agreement shall provide that the following contributions
will be made to the Securities Settlement Fund.

                        (i)     Cash. Hanover has deposited $29.5 (the
"Securities Settlement Cash") into an escrow fund (the "Account"), with Lead
Counsel acting as escrow agent on the terms set forth in an agreement between
Hanover and Lead Counsel related thereto. Hanover shall also make an additional
deposit equal to $3 million within 5 days of the earlier of: (A) a change of
control; or (B) a shareholder approval of a change of control, if such event
occurs prior to 12 months following the date of final Court approval of the
Settlement.

                        (ii)    Common Stock. GKH, Hanover, and Lead Plaintiffs'
Counsel agree that Hanover, GKH, and Lead Plaintiff shall, consistent with the
Securities

                                        7



Settlement Agreement, move the Federal Court to create a qualified settlement
fund under Section 468B of the Internal Revenue Code or create such other
vehicle as Hanover and the Settling Securities Plaintiffs may agree into which:
(A) Hanover shall contribute 2,500,000 shares of Hanover common stock (the
"Hanover Contributed Stock"), which will be registered, exempt from registration
under the Securities Act of 1933, or to be registered prior to their
distribution by or pursuant to the Securities Settlement Agreement to be
distributed to a transfer agent to be distributed to the Securities Plaintiff
Class with Hanover and Lead Plaintiffs' Counsel cooperating to take such actions
as are necessary to comply with the rules of the New York Stock Exchange; and
(B) GKH shall contribute 2,500,000 shares of Hanover common stock (the "GKH
Contributed Stock"), which are registered, exempt from registration under the
Securities Act of 1933, or to be registered prior to their distribution, by or
pursuant to the Securities Settlement Agreement, to be distributed to a transfer
agent to be distributed to the Settling Securities Plaintiff Class, with Hanover
and Lead Plaintiffs' Counsel cooperating to take such actions as are necessary
to comply with the rules of the New York Stock Exchange. The GKH Contributed
Stock and the Hanover Contributed Stock are referred to collectively as the
"Securities Settlement Stock."

                        (iii)   Note. Hanover shall issue a note (the "Note")
after the Effective Date of the settlement in a Principal Amount of
$6,665,000.00.

                        B.      The Maturity Date of the Note shall be March 31,
2007. On the Maturity Date, the Principal Amount together with accrued interest
shall be payable at an effective annual yield of 5% computed from the date of
approval of the Settlement by the Federal Court, provided, however, that if a
change of control occurs prior to March 1, 2007 and: (A) the change of control
results in Hanover's common stock being acquired for $12.25 or more then the
Note is extinguished; or (B) the change of control results in Hanover's common
stock being acquired for less than $12.25 then the Principal Amount together
with any interest that has accumulated shall be due and payable 30 days
following the change in control but not earlier than the Effective Date of the
Securities Settlement.

                        C.      If at any time after the earlier of: (A) March
31, 2004 and (B) the first distribution to the Settling Securities Plaintiffs
from the settlement fund and prior to the Maturity Date, the average of the
closing price of Hanover common stock equals or exceeds $12.25 for any 15
consecutive trading days, the obligation to perform on the Note is extinguished.

                        D.      The Note shall be an unsecured note and shall
not be subordinated to any other unsecured obligations.

                        E.      The Note shall be non-transferable, indivisible,
and non-assignable by the Settling Securities Plaintiff Class.

                (d)     Costs. All claims of the Settling Securities Plaintiff
Class against the Settling Securities Defendants in the Consolidated Securities
Action, all fees of counsel to the Settling Securities Plaintiff Class, and all
other administrative or other

                                        8



approved expenses of the Settlement, including all notice expenses and escrow
costs, shall be paid from the Securities Settlement Cash. An amount of cash, not
to exceed $100,000 shall be made available out of the Securities Settlement Cash
to the Lead Plaintiffs' Counsel for purposes of defraying the actual cost of
notice to the Settling Securities Plaintiff Class.

                (e)     Supplemental Securities Settlement Agreement. The
Settling Securities Parties will execute a mutually agreeable definitive
Supplemental Settlement Agreement to be executed within 5 days of execution of a
Stipulation of Settlement (the "Supplemental Securities Settlement Agreement").
The Supplemental Securities Settlement Agreement will provide for the
termination of the Securities Settlement and the Securities Settlement Agreement
at the sole election of defendant Hanover in the exercise of its absolute
discretion, in the event that, after the execution of the Securities Settlement
Agreement, a certain number of the members of the Settling Securities Plaintiff
Class owning a specified amount of Hanover securities during the Class Period
deliver timely or otherwise valid requests for exclusion from the Class or
initiate actions or assert claims against one or more of the Settling Securities
Defendants based in whole or in part, on the released claims set forth in
paragraph 2(b) above. The Supplemental Securities Settlement Agreement shall be
held strictly confidential by the Settling Securities Parties and not publicly
disclosed or filed with the Federal Court (except required by law or as the
Federal Court may order, or, as is necessary to obtain enforcement or judicial
construction thereof (in which case it shall be filed under seal)).

                (f)     Attorneys' Fees. Counsel for Settling Securities
Plaintiff Class may apply to the Federal Court for an award of attorneys' fees
and reimbursement of all expenses incurred on behalf of the Securities
Plaintiffs Class. Such fees and expenses and interest shall be payable solely
out of the Securities Settlement Fund and shall be deducted from the Securities
Settlement Fund prior to the distribution to the members of the Settling
Securities Plaintiff Class following entry of an order by the Federal Court
approving any fees and expenses to Settling Securities Plaintiffs' counsel. Lead
Plaintiffs' Counsel may withdraw from the escrow account and allocate amongst
counsel for the Securities Plaintiffs the fees and expenses so awarded;
provided, however, that in the event that the order approving the fee and
expense award is reversed or modified on appeal, and in the event that
Plaintiffs' counsel has received payment, such counsel shall, within five (5)
business days of the date which the fee and expense award is modified or
reversed, refund to the Escrow Account the fees and expenses previously received
by them in full or in any amount consistent with such reversal or modification,
plus the interest earned thereon through the date of such refund. If a refund of
settlement stock is required, either the stock or the proceeds derived
therefrom, if previously sold, shall be returned, provided that Lead Plaintiffs'
Counsel shall refund within 10 business days of any modification or reversal of
a fee or expense award, any fees and expenses and stock (or proceeds) discussed
above, which is not refunded by Plaintiffs' counsel as directed above.

                (g)     Conditions to Securities Settlement. If any of the
conditions set forth in this paragraph are not met and the Settling Securities
Parties choose not to proceed with the Securities Settlement, the Securities
Settlement shall be null and void

                                        9



and of no force and effect and: (A) the Securities Settlement Cash, together
with any interest therein, net of any actual costs incurred for notice expenses,
will be returned to Hanover; (B) the Securities Settlement Stock (or the
proceeds from any sale of such stock) will be returned to Hanover and GKH
consistent with their contributions to the Settlement Fund; and (C) the Note
will be extinguished. The consummation of the Securities Settlement contemplated
herein is subject to:

                        (i)     the drafting and execution of a Securities
Settlement Agreement and the Supplemental Securities Settlement Agreement that
is acceptable to the Settling Securities Parties and of such pleadings and
notices as may be required to obtain the Federal Court's approval of the
Settlement;

                        (ii)    the funding of the Securities Settlement Fund as
provided above;

                        (iii)   the implementation of the corporate governance
provisions as provided for in Exhibit A attached hereto;

                        (iv)    preliminary approval by the Federal Court of the
Settlement;

                        (v)     certification of the Settling Securities
Plaintiff Class for settlement purposes only by the Court;

                        (vi)    Hanover's determination not to exercise its
termination rights, if any, under the Supplemental Securities Settlement
Agreement;

                        (vii)   final approval by the Federal Court of the
Securities Settlement, except with respect to attorneys' fees requested by
counsel to the Settling Securities Plaintiff Class or as to the plan of
allocation; and

                        (viii)  a final judgment, which means a judgment entered
by the Federal Court, approving the Securities Settlement and dismissing all
claims that have been or could have been brought in the Consolidated Securities
Action as against the Settling Securities Defendants with prejudice and without
costs to any party, that has become final and no longer subject to further
appeal or review, whether by exhaustion of any possible appeal, lapse of time or
otherwise.

III.    SETTLEMENT TERMS FOR SHAREHOLDER DERIVATIVE ACTIONS

                (a)     Derivative Settlement Agreement. The Settling Derivative
Parties shall use reasonable efforts, acting in good faith, to agree upon,
execute, submit to the Federal Court, and move the Federal Court for preliminary
approval of a mutually agreeable definitive settlement agreement (and such other
documentation as may be required in order to obtain final approval of the
settlement of the claims that have been or could be asserted in the Derivative
Actions (the "Derivative Settlement") by the Federal Court within 45 days of
execution of this Memorandum (the "Derivative Settlement

                                       10



Agreement"). The terms of the Derivative Settlement Agreement shall be
consistent with the terms of this Memorandum and shall provide:

                        (i)     that the Settling Derivative Defendants have
denied, and continue to deny, any and all allegations contained in the
Derivative Actions and that they are entering into the Settlement in order to
eliminate the burden, expense, distraction and uncertainties of further
litigation;

                        (ii)    for the release of claims against the Released
Derivative Parties, pursuant to the terms set forth below;

                        (iii)   that the Settling Derivative Plaintiffs
expressly warrant that, in entering into the Derivative Settlement, they relied
solely upon their own knowledge and investigation (to include the knowledge and
investigation of counsel), and not upon any promise, representation, warranty,
or other statement by the Settling Derivative Defendants not expressly contained
in this Memorandum or the Derivative Settlement Agreement itself; and

                        (iv)    that in full and final settlement of all claims
asserted or referred to in the Derivative Action, and all claims that have been
and could be asserted against the Settling Derivative Defendants in the
Derivative Actions, the Settling Derivative Parties agree to the following:

                                A.      that the Board of Directors of Hanover
adopt by resolution, or other means as appropriate, the changes regarding
corporate governance as set forth in Exhibit A to the Memorandum;

                                B.      that counsel for plaintiffs in the
Settling Derivative Actions were a material participant in the settlement
negotiations and the Settling Derivative Actions were a substantial factor in
obtaining the following benefits for the Company:

                                        1.      Payment of at least $28 million
by Defendants' D&O Insurers into the Securities Settlement Fund;

                                        2.      Contribution of 2,500,000 shares
of Hanover common stock by GKH as provided for in paragraph 2(a)(iii), above;

                                        3.      Substantial corporate governance
enhancements, including the appointment of additional independent directors and
the regular rotation of Hanover's outside audit firm, as detailed in Exhibit A
attached hereto.

                (b)     Hanover agrees to pay, upon Court Approval of the
Derivative Settlement, a fee and expense award to counsel for the Derivative
Plaintiffs of 75,000 shares of Hanover common stock to be paid from the Hanover
Contributed Stock, and $775,000, of which $75,000 will be allocated and paid to
counsel in the derivative action, Koch v. O'Connor, et al., in exchange for the
printing and mailing of appropriate court-directed individual notice to the
shareholders of Hanover entitled to receive such notice,

                                       11



as well as any other required or appropriate notice to be made by publication or
otherwise, and of which $300,000 shall be allocated and paid to THE BRUALDI LAW
FIRM.

                (c)     For such other matters that are customarily included in
stipulations governing the settlement of derivative actions.

                (d)     Released Claims. The Derivative Settlement shall contain
a full and general release as to all Released Derivative Parties. The releases
set forth in the Derivative Settlement Agreement shall cover all claims both
known and unknown, with the Settling Derivative Parties agreeing to waive the
benefits of Section 1542 of the California Civil Code (or by any law of any
state or territory of the United States or principle of common law that is
similar, comparable or equivalent to Section 1542 of the California Civil Code)
which provides:

        A general release does not extend to claims which the creditor does not
        know or suspect to exist in his favor at the time of executing the
        release, which if known by him must have materially affected his
        settlement with the debtor.

                (e)     Notice Costs. Plaintiffs' counsel in the Settling
Derivative Actions shall be responsible for funding and administering
appropriate court-directed individual notice to the shareholders of Hanover
entitled to receive such notice, as well as any other required or appropriate
notice to be made by publication or otherwise.

                (f)     Conditions to Settlement. This Derivative Settlement
shall be null and void and of no force and effect should any of these conditions
not be met. The consummation of the Derivative Settlement contemplated herein is
subject to:

                        (i)     the drafting and execution of a Derivative
Settlement Agreement that is acceptable to all parties hereto and of such
pleadings and notices as may be required to obtain the Federal Court approval of
the Derivative Settlement;

                        (ii)    preliminary approval by the Federal Court;

                        (iii)   final approval by the Federal Court;

                        (iv)    a final judgment, which means a judgment entered
by the Federal Court, approving the Derivative Settlement and dismissing all the
claims that have been or could be asserted in the Derivative Actions as against
the Settling Derivative Defendants with prejudice and without costs to any
party, that has become final and no longer subject to further appeal or review,
whether by exhaustion of any possible appeal, lapse of time or otherwise;

                        (v)     the payment of the fee and expense award to
counsel for the Derivative Plaintiffs; and

                                       12



                        (vi)    dismissal with prejudice of the Settling State
Derivative Action without additional consideration.

IV.     SETTLEMENT TERMS FOR THE ERISA ACTIONS

                (a)     ERISA Settlement Agreement. The Settling ERISA Parties
shall use all reasonable efforts, acting in good faith, to agree upon, execute,
and move the Federal Court for preliminary approval of a mutually agreeable
definitive Settlement Agreement (and such other documentation as may be required
in order to obtain final approval of the settlement of the claims that have been
or could be asserted in the ERISA Actions (the "ERISA Settlement") within 45
days of execution of this Memorandum (the "ERISA Settlement Agreement"). The
terms of the ERISA Settlement Agreement shall be consistent with the terms of
this Memorandum and shall provide:

                        (i)     that the Settling ERISA Defendants have denied,
and continue to deny that they have liability as a result of any and all
allegations contained in the ERISA Actions and that they are entering into the
Settlement in order to eliminate the burden, expense, distraction and
uncertainties of further litigation;

                        (ii)    for the creation of a settlement fund in the
amount of $1.775 million in cash (the "ERISA Settlement Fund"). The ERISA
Settlement Fund shall be funded by withdrawing cash from the Securities
Settlement Fund;

                        (iii)   for the release of claims against the Released
ERISA Parties pursuant to the terms set forth below;

                        (iv)    that the Settling ERISA Plaintiffs expressly
warrant that, in entering into the Settlement, they relied solely upon their own
knowledge and investigation (to include the knowledge and investigation of
counsel), and not upon any promise, representation, warranty, or other statement
by the Settling ERISA Defendants not expressly contained in this Memorandum or
the ERISA Settlement Agreement itself;

                        (v)     for such other matters that are customarily
included in stipulations governing the settlement of ERISA actions.

                (b)     Class Certification. Solely for purposes of settlement
and dismissal of the ERISA Actions, the Settling ERISA Parties shall seek
certification of the Settling ERISA Plaintiff Class by the Federal Court.

                (c)     Relief to Plan. The ERISA Settlement contemplated herein
shall be a settlement both of the claims made on a class action basis and a
settlement of the claims made on behalf of the Plan. It is contemplated that the
Plan, acting through its trustee(s) or other named fiduciaries, will be the
immediate recipient of the ERISA Settlement Fund (after deducting these from
awarded fees and costs) following consummation of the ERISA Settlement, and that
the Plan will, without charge to the Plan participants, distribute the same to
the individual accounts of Plan Participants in a manner to be agreed by the
Settling ERISA Parties.

                                       13



                (d)     Claim by Plan In Securities Class Action. The Plan,
acting through its trustee(s) or other named fiduciaries, shall have a right to
make a claim in the Consolidated Securities Action for recovery, through the
Securities Settlement Fund, on behalf of the Plan (and through the Plan on
behalf of each Plan participant), with respect to each share of Hanover common
stock (or other security) purchased in or by the Plan during the Class Period.
This claim is in addition to the ERISA Settlement Fund, and it shall not be
reduced by or on account of the ERISA Settlement Fund. Distributions of funds to
members of the ERISA Plaintiff Class and/or Securities Plaintiff Class shall be
as specified in the Plan of Distribution.

                (e)     Released Claims. The ERISA Settlement Agreement shall
contain a full and general release of all Released ERISA Parties. The release
shall cover any and all rights, demands, causes of action, suits, matters, and
issues that have been, might have been or could be asserted against the Released
ERISA Parties in the ERISA Actions by or on behalf of the Settling ERISA
Plaintiffs, any past or present participant or beneficiary of the Plan, or the
Plan itself, in any court of competent jurisdiction, including, but not limited
to, claims for negligence, gross negligence, professional negligence, breach of
duty of care and/or breach of duty of loyalty and/or breach of duty of candor,
fraud, breach of fiduciary duty, mismanagement, corporate waste, malpractice,
breach of contract, negligent misrepresentation, violations of state or federal
statutes, rules or regulations and any unknown claims, arising out of or
related, directly or indirectly, in any way, to the allegations, transactions,
facts, matters or occurrences, representations or omissions involved, set forth,
referred to or that could have been asserted in the ERISA Actions, provided,
however, that the releases shall be limited to matters pertaining to the Plan
that were or could have been prosecuted on a Plan-wide or Class-wide basis. The
releases set forth in the ERISA Settlement Agreement shall cover all claims both
known and unknown, with the Settling ERISA Parties agreeing to waive the
benefits of Section 1542 of the California Civil Code (or by any law or any
state or territory of the United States or principle of common law that is
similar, comparable or equivalent to Section 1542 of the California Civil Code)
which provides:

        A general release does not extend to claims which the creditor does not
        know or suspect to exist in his favor at the time of executing the
        release, which if known by him must have materially affected his
        settlement with the debtor.

                (f)     Structural and Equitable Relief. The Plan shall provide
that each Plan Participant shall have the right to direct the investment of his
or her Employer Contribution, upon the vesting thereof, in the same manner and
among the same investment alternatives as are available for the investment of
employee contributions to the Plan (provided, however, that the Employer
Contributions may continue to be made in the form of Company stock).

                (g)     Attorneys' Fees. Counsel for Settling ERISA Plaintiffs
may apply to the Court for an award of attorneys' fees and reimbursement of all
expenses incurred herein. Such fees and expenses and interest shall be payable
solely out of the ERISA Settlement Fund and shall be deducted from the ERISA
Settlement Fund prior to the

                                       14



distribution thereof to the Plan. Following entry of any order by the Federal
Court approving any fees and expenses to Settling ERISA Plaintiffs' counsel,
counsel for Settling ERISA Plaintiffs may withdraw from the escrow account and
allocate amongst counsel for the Settling ERISA Plaintiffs the fees and expenses
so awarded, provided, however that in the event that the order approving the fee
and expense award is reversed or modified on appeal, and in the event that
Plaintiffs' counsel has received payment, such counsel shall, within five (5)
business days of the date which the fee and expense award is modified or
reversed, refund to the Escrow Account the fees and expenses previously received
by them in full or in any amount consistent with such reversal or modification,
plus the interest earned thereon through the date of such refund. If a refund of
settlement stock is required, either the stock or the proceeds derived
therefrom, if previously sold, shall be returned, provided that Counsel for
Settling ERISA Plaintiffs shall refund within 10 business days of any
modification or reversal of a fee or expense award, any fee and expense and
stock (or proceeds) discussed above, which is not refunded by Plaintiffs'
counsel as directed above.

                (h)     Award to Named Plaintiff. The named plaintiff in Kirkley
v. Hanover, et al., Case No. H-03-1155 will submit to the Federal Court an
application for an award, in recognition of his services, not to exceed
$2,500.00. Such award, if approved, shall be paid from the ERISA Settlement Fund
prior to distribution thereof to the Plan.

                (i)     Notice Issues. The Plan shall be responsible for
providing notice to members of the Settling ERISA Plaintiff Class appropriate
court-directed notice, as well as any other required or appropriate notice to be
made by publication or otherwise.

                (j)     Conditions to the ERISA Settlement. This ERISA
Settlement shall be null and void and of no force and effect should any of these
conditions not be met. The consummation of the ERISA Settlement contemplated
herein is subject to:

                        (i)     that in full and final settlement of all claims
asserted or referred to in the ERISA Actions, and all claims that have been and
could be asserted against the Settling ERISA Defendants in the ERISA Actions,
the Settling ERISA Parties agree to the following:

                                A.      the creation and funding of the ERISA
Settlement Fund as provided above;

                                B.      the implementation of the structural and
equitable relief provided above;

                        (ii)    the drafting and execution of an ERISA
Settlement Agreement that is acceptable to Settling ERISA Parties hereto and of
such pleadings and notices as may be required to obtain the Federal Court's
approval of the Settlement;

                        (iii)   preliminary approval by the Federal Court;

                        (iv)    final approval by the Federal Court;

                                       15



                        (v)     a final judgment, which means a judgment entered
by the Federal Court, approving the ERISA Settlement and dismissing all claims
that have been or could have been brought in the ERISA Actions as against the
Settling ERISA Defendants with prejudice and without costs to any party, that
has become final and no longer subject to further appeal or review, whether by
exhaustion of any possible appeal, lapse of time or otherwise; and

V.      OTHER TERMS

                (a)     Stock Splits, Stock Dividends and Reverse Stock Splits.
The total number of shares to be contributed to the Settlement Fund will be
adjusted to reflect any changes due to stock splits, stock dividends or reverse
stock splits. The per share prices detailed herein shall be adjusted to account
for stock splits, stock dividends, mergers, recapitalizations, reorganizations
or other corporate transactions involving Hanover.

                (b)     Costs. All costs, including those of Hanover's transfer
agent, incurred in issuing and distributing any Settlement Stock to the
recipients shall be borne by Hanover.

                (c)     Rights With Respect to the Settlement Stock. In order
that the Settlement Stock may be distributed to and be fully and freely traded
by the recipients without any restrictions, ten (10) days before the hearing
date for final approval of the Securities Settlement, Hanover shall provide Lead
Plaintiffs' Counsel with the written opinion of outside counsel substantially to
the effect: (a) that the Settlement Stock will be issued in compliance with the
registration requirements of Section 5 of the Securities Act of 1933 or will be
issued in reliance upon an exemption therefrom; (b) that the Settlement Stock is
fully tradeable without any restriction after distribution (except that
affiliates of Hanover may be required to sell in accordance with Rule 144
promulgated under the Act); and (c) that such shares are otherwise fully paid,
non-assessable and free from all liens and encumbrances.

                (d)     Bar Order. The Settlement Stipulation in each of the
Actions shall limit the ability of any non-settling person, including
PricewaterhouseCoopers, to sue, seek indemnification from or otherwise seek
contribution from any of the Settling Parties and shall provide for such other
limitations as are appropriate under and consistent with the provisions of the
Private Securities Litigation Reform Act. In addition, the Settlement
Stipulation in each of the Actions shall limit the ability of any of the
Settling Parties and/or Released Parties from suing, seeking indemnification
from or seeking contribution from any of the other Settling Parties and/or
Released Parties with respect to any matter relating to, arising from, or in any
way connected to the Settlement.

                (e)     Press Release. Settling Plaintiffs and Hanover agreed to
consult with each other prior to issuing their initial public announcement or
public statement concerning the Settlement.

                                       16



VI.     CONDITIONS TO SETTLEMENT

                (a)     Bank Approval: Hanover's obligation to conclude the
Settlement is specifically conditioned on obtaining any necessary approval from
its banks or other lenders, which it shall seek in good faith.

                (b)     Performance By Third Parties: Hanover's obligation to
consummate the Settlement is specifically conditioned on (1) Hanover's directors
and officers insurance carriers providing the funding that each have agreed to
perform through separate agreements with Hanover; and (2) GKH's performance
under this Memorandum and under a separate agreement between GKH and Hanover;
provided, however, that at Hanover's sole election it may waive the performance
of any or all of the above parties and consummate the Settlement on the terms
set forth in this Memorandum. GKH's obligation to consummate the Settlement is
conditioned on Hanover's performance under the Settlement, whose terms are to be
consistent with this Memorandum, including, if applicable, Hanover's performance
in lieu of directors and officers insurance carrier.

                (c)     Cross-Contingency: Hanover may, in its sole discretion,
terminate any or all of the (1) Securities Settlement Agreement, (2) Derivative
Settlement Agreement, and (3) ERISA Settlement Agreement, in the event that the
Federal Court does not approve the settlement of all of such Actions; provided,
however, that nothing herein shall inhibit Hanover from consummating the
settlement of any of the Actions despite the disapproval of the settlement of
any other Actions.

                (d)     Specific Performance: The Settling Parties acknowledge
that the failure to complete the Settlement under the terms of this Memorandum
will result in irreparable harm that cannot be adequately compensated through
money damages and that each therefore agrees that specific performance is the
appropriate remedy for breach of this Memorandum, provided, however, that only
the Settling Plaintiffs, Hanover and GKH may seek relief under this section.

                (e)     Confirmatory Discovery. Following execution of the
Memorandum, the Settling Plaintiffs and Settling Defendants will conduct such
additional reasonable discovery, which will be completed within 45 days from
execution of the Memorandum, as the Parties agree is necessary and appropriate
to confirm the fairness, reasonableness and adequacy of the terms of the
Settlement; provided, however, that such confirmatory discovery period may be
extended by agreement of the Settling Parties if such extension is necessary to
ensure that the Settlement is fair, reasonable and adequate.

VII.    GENERAL TERMS

                (a)     Further Documentation. The Settling Securities Parties,
the Settling Derivative Parties and the Settling ERISA Parties acknowledge that
this Memorandum does not set forth all of the substantive terms necessary and
appropriate for a complete and final Settlement of the Consolidated Securities
Action or the Derivative

                                       17



and ERISA Actions, and undertake to work in good faith to memorialize such
terms, which shall be embodied in the Securities Settlement Agreement, the
Derivative Settlement Agreement and/or the ERISA Settlement Agreement.

                (b)     Amendments. This Memorandum and all documents executed
pursuant hereto and thereto, shall constitute a legally binding and enforceable
obligation on the part of each of the parties hereto and their
successors-in-interest, subject only to their terms and conditions set forth
herein and therein. This Memorandum may be amended only by a written instrument
signed by each of the respective parties hereto, or their counsel acting on
their behalf.

                (c)     Entire Agreement. This Memorandum and all documents
executed pursuant hereto and thereto, constitute the entire agreement between
the parties with respect to the matters discussed herein and supersedes any and
all prior negotiations, discussions, agreements or undertakings, whether oral or
written, with respect to such matters. This Memorandum shall be deemed drafted
equally by all parties hereto.

                (d)     Counterparts. This Memorandum may be executed in
counterparts by any of the signatories hereto, and as so executed shall
constitute one agreement.

                                       18



/s/ Kevin T. Abikoff                    Date:  10/13/03
- ------------------------------
Kevin T. Abikoff
HUGHES HUBBARD & REED LLP
1775 I Street, N.W.
Washington, D.C.  20006-2401
Telephone:  202-721-4600
Facsimile:  202-721-4646

Counsel for Defendant Hanover Compressor
Corporation and Chad Deaton

/s/ Darren J. Robbins                   Date:  10/13/03
- ------------------------------
Darren J. Robbins
Randall Steinmeyer
Amber L. Eck
MILBERG WEISS BERSHAD HYNES & LERACH LLP
401 B Street, Suite 1700
San Diego, CA  92101
Telephone:  619-231-1058
Facsimile:  619-231-7423

Counsel for Settling Securities Plaintiffs and
Lead Plaintiffs Pirelli Armstrong Tire,
Retiree Medical Benefits Trust, Plumbers &
Steamfitters, Local 137 Pension Fund,
O. Bryant Lewis, 720 Capital Management,
LLC and Specialists DPM

/s/ Richard B. Brualdi                  Date:  9/25/03
- ------------------------------
Richard B. Brualdi
Kevin T. O'Brien
THE BRUALDI LAW FIRM
29 Broadway, Suite 1515
New York, New York 10006
Telephone: 212-952-0602
Facsimile: 212-785-1618

Counsel for Settling Derivative Plaintiff
Harbor Finance Partners

                                       19



/s/ Paul T. Warner                      Date:  10/2/03
- ------------------------------
Paul T. Warner
REICH & BINSTOCK
4265 San Felipe, Suite 1000
Houston, TX 77027
Telephone: 713-622-7271
Facsimile: 713-623-8724

Counsel for Settling Derivative Plaintiffs
Roger Koch, Henry Carranza and William
Steves

/s/ David M. Goldstein                  Date:  9/26/03
- ------------------------------
David M. Goldstein
MARICIC & GOLDSTEIN, LLP
10535 Foothill Blvd., Suite 300
Rancho Cucamongo, CA  91729
Telephone:  909-945-9549
Facsimile:  909-980-5525

Counsel for Settling Derivative Plaintiff
William Steves

/s/ Neil Rothstein                      Date:  10/2/03
- ------------------------------
Neil Rothstein
SCOTT & SCOTT, LLC
P.O. Box 192
108 Norwich Avenue
Colchester, CT 06415
Telephone:  1-800-404-7770
Facsimile:  1-860-537-4432

Counsel for Settling Derivative
Plaintiff Henry Carranza

                                       20



/s/ Brian J. Robbins                    Date:  10/2/03
- ------------------------------
Brian J. Robbins
ROBBINS UMEDA & FINK, LLP
1010 Second Avenue, Suite 2360
San Diego, CA 92101
Telephone: 619-525-3990
Facsimile: 619-525-3991

Counsel for Settling Derivative Plaintiff
Roger Koch

/s/ Robert Schubert                     Date:  10/3/03
- ------------------------------
Robert Schubert
SCHUBERT & REED LLP
Two Embarcadero Center
Suite 1660
San Francisco, CA  94111
Telephone:  415-788-4220
Facsimile:  415-788-0161

Counsel for Settling Derivative Plaintiffs
John B. Hensley, Jr.

/s/ John G. Emerson                     Date:  9/27/03
- ------------------------------
John G. Emerson
Scott E. Poynter
EMERSON POYNTER LLP
1509 Louisiana, Suites C & D
Little Rock, AR 72202-5094
Telephone: 501-907-2555
Facsimile: 501-907-2556

Counsel for Settling Derivative Plaintiff
Coffelt Family LLC

                                       21



/s/ James Baskin                        Date:  9/29/03
- ------------------------------
James Baskin
BASKIN LAW FIRM
300 W. 6th Street, Suite 1950
Austin, TX  78701
Telephone:  512-381-6300
Facsimile:  512-322-9280

Counsel for Settling ERISA Plaintiff
Henry Duncan Kirkley

/s/ Thomas Bilek                        Date:  9/1/03
- ------------------------------
Thomas Bilek
HOEFFNER & BILEK, L.L.P.
440 Louisiana Ste., 720
Houston, TX  77002
Telephone:  713-227-7720
Facsimile:  713-227-9404

Counsel for Settling ERISA Plaintiffs
Ann Angleopoulos and Joyce Freeman

/s/ Andrew Barroway                     Date:  9/1//03
- ------------------------------
Andrew L. Barroway
Robert B. Weiser
Eric L. Zager
SCHIFFRIN & BARROWAY
Three Bala Plaza East, Suite 400
Bala Cynwyd, PA  19004
Telephone:  610-667-7706
Facsimile:  610-667-7056

Counsel for Settling ERISA Plaintiff
Ann Angleopoulos

                                       22



/s/ Evan Smith                          Date:  9/3/03
- ------------------------------
Evan Smith
BRODSKY & SMITH, LLC
240 Mineola Boulevard
Mineola, New York 11501
Telephone: 516-741-4977
Facsimile: 610-667-9029

Counsel for Settling ERISA Plaintiff
Joyce Freeman

/s/ Pamela G. Smith                     Date:  10/7/03
- ------------------------------
Pamela G. Smith
David H Kistenbroker
KATTEN MUCHIN ZAVIS &
ROSENMAN
525 West Monroe, Suite 1600
Chicago, IL 60661-3693
Telephone: 312-902-5200
Facsimile: 312-577-4770

Counsel for Defendant William S. Goldberg

/s/ Edward B. Horahan                   Date:  9/25/03
- ------------------------------
Edward B. Horahan, III
DECHERT LLP
1775 I Street, N.W.
Washington, DC 20006-2401
Telephone:  202-261-3300
Facsimile:  202-261-3333

Counsel for Defendant Charles D. Erwin

/s/ Eric. J.R. Nichols                  Date:  10/11/03
- ------------------------------
Eric J.R. Nichols
BECK REDDEN & SECREST
One Houston Center
1221 McKinney St., Suite 4500
Houston, TX 77010-2010
Telephone:  713-951-3701
Facsimile:  713-951-3720

Counsel for Defendant Michael J. McGhan

                                       23



/s/ Craig Smyser                        Date:  9/24/03
- ------------------------------
Craig Smyser
SMYSER KAPLAN & VESELKA, L.L.P.
Bank of America Center
700 Louisiana Street, Suite 2300
Houston, TX 77002
Telephone:  713-221-2300
Facsimile:  713-221-2320

Counsel for Defendants Melvyn N. Klein,
Ted Collins, Jr., Robert R. Furgason,
Rene J. Huck and Alvin V. Shoemaker

/s/ Harvey G. Brown, Jr.                Date:  10/3/03
- ------------------------------
Harvey G. Brown, Jr.
THE WRIGHT LAW FIRM
Three Riverway, Suite 1660
Houston, TX 77057
Telephone: 713-572-4321
Facsimile: 713-572-4320

Counsel for Defendant
Michael A. O'Connor

/s/ Steven J. Rothschild                Date:  9/25/03
- ------------------------------
Steven J. Rothschild
SKADDEN, ARPS, SLATE, MEAGHER
& FLOM LLP
One Rodney Square
Wilmington, DE 19801
Telephone: 302-651-3000
Facsimile: 302-651-3001

Counsel for Defendants Victor E. Grijalva,
Gordon T. Hall and I. Jon Brumley

                                       24



/s/ Richard A. Rosen                    Date:  9/27/03
- ------------------------------
Richard A. Rosen
PAUL, WEISS, RIFKIND, WHARTON &
GARRISON LLP
1285 Avenue of the Americas
New York, NY 10019-6064
Telephone:  212-373-3000
Facsimile:  212-757-3990

Counsel for GKH

                                       25


                               HANOVER COMPRESSOR
                   CORPORATE GOVERNANCE SETTLEMENT TERM SHEET

Within 30 days following entry of an order approving the settlement of the
Action, the Company's Board of Directors will adopt resolutions or amendments to
the Company's By-Laws or Articles of Incorporation to ensure adherence to the
following Corporate Governance Policies; provided, however, that with respect to
any policy affecting the composition of the Board of Directors, the Company, at
its sole election, may elect to make any required change through a vote of
shareholders at the annual meeting following the next election of directors
after the entry of the final order approving settlement; provided further that
if any such election is not at least 45 days after the approval of the final
settlement then such changes may be deferred until the next annual election of
directors. The Company agrees that the governance provisions included herein
will remain in effect for five years or such earlier time as there is a Change
in Control of the Company (as defined in the Company's 2003 Stock and Incentive
Plan); provided, however, that any proposed guideline can be altered or removed
if the Board, in good faith and upon the advice of counsel, and after
consultation with Plaintiffs' settlement counsel, who agrees to act reasonably
and in good faith, determines that such guideline conflicts with or is
substantially redundant with any law, regulation or rule (including rules of the
New York Stock Exchange or other exchange or quotation system on which the
Company's stock is listed or traded (collectively, herein, "NYSE")), or
conflicts with or is substantially redundant with any amendment to the Company's
articles of incorporation approved by the Company's shareholders.

I.      BOARD OF DIRECTORS

        A.      Director Independence:

                .       Every director standing for election shall stand for a
                        one-year term.

                .       No person who has reached the age of 72 shall be
                        eligible for election or re-election as a director of
                        the Company.

                .       At least a majority of the Board, including the Chairman
                        of the Board, shall be "independent directors," as
                        defined below; provided, however, that within 12 months
                        two-thirds of the Board shall be "independent directors"
                        as defined below.

                .       To be deemed "independent" in any calendar year, a
                        director would have to satisfy the following
                        qualifications:

                        (a)     has not been employed as an elected officer of
                                the Company or its subsidiaries or affiliates
                                (defined for purposes of this settlement term
                                sheet as any individual or business entity that
                                owns at least

                                       A-1



                                12.5% of the securities of the Company having
                                ordinary voting power) within the last five
                                calendar years;

                        (b)     has not received, during the current calendar
                                year or any of the three immediately preceding
                                calendar years, remuneration, directly or
                                indirectly, other than de minimus remuneration,
                                as a result of service as, or compensation paid
                                to an entity affiliated with the director that
                                serves as, (i) an advisor, consultant, or legal
                                counsel to the Company or to a member of the
                                Company's senior management; or (ii) a
                                significant customer or supplier of the Company;
                                provided, however, that any director who is a
                                current member of the Board at the time that
                                this MOU is executed and within the last three
                                years has retired from an entity that would
                                otherwise fit the definition included in (i) or
                                (ii) of this paragraph shall not be rendered
                                non-independent by virtue of remuneration he or
                                she received prior to joining the Board of the
                                Company;

                        (c)     has no personal services contract(s) with the
                                Company, or any member of the Company's senior
                                management;

                        (d)     is not affiliated with a not-for-profit entity
                                that receives significant contributions from the
                                Company;

                        (e)     during the current calendar year or any of the
                                three immediately preceding calendar years, has
                                not had any business relationship with the
                                Company for which the Company has been required
                                to make disclosure under Regulation S-K of the
                                SEC, other than for service as a director or for
                                which relationship no more than de minimus
                                remuneration was received in any one such year;
                                provided, however, that the need to disclose any
                                relationship that existed prior to a director
                                joining the Board shall not in and of itself
                                render the director non-independent;

                        (f)     is not employed by a public company at which an
                                executive officer of the Company serves as a
                                director,

                        (g)     has not had any of the relationships described
                                in subsections (a)-(f) above, with any affiliate
                                of the Company;

                        (h)     is not a member of the immediate family of any
                                person described in subsections (a)-(g) above;
                                and

                        (i)     a director is deemed to have received
                                remuneration (other than remuneration as a
                                director, including remuneration provided to a
                                non-executive Chairman of the Board, Committee
                                Chairman, or Lead Director), directly or
                                indirectly, if remuneration, other than de
                                minimis remuneration, was paid by the Company,
                                its subsidiaries, or affiliates, to any entity
                                in which the director has a

                                       A-2



                                beneficial ownership interest of five percent or
                                more, or to an entity by which the director is
                                employed or self-employed other than as a
                                director. Remuneration is deemed de minimis
                                remuneration if such remuneration is $60,000 or
                                less in any calendar year, or if such
                                remuneration is paid to an entity, it (i) did
                                not for the calendar year exceed the lesser of
                                $5 million, or five percent (5%) of the gross
                                revenues of the entity; and (ii) did not
                                directly result in a material; increase in the
                                compensation received by the director from that
                                entity.

                .       The Company shall adopt share ownerships guidelines for
                        its directors that are designed to align the interests
                        of the Board with those of shareholders, taking into
                        account that share ownerships requirements must ensure
                        that Board members have a sufficient stake in the
                        Company to share in the financial fortunes of
                        shareholders while also considering the appropriate
                        financial planning and needs of individual directors. At
                        least 50% of directors' annual fees shall be paid in
                        stock, provided that this amount may be reduced by any
                        restricted stock award granted to a director.

                .       The Board shall hold an executive session at least twice
                        each year at which employee directors are not present.

        B.      The Nominating Committee, the Compensation Committee and the
                Audit Committee of the Board of Directors shall each be composed
                entirely of independent directors.

        C.      The offices of Chairman of the Board and Chief Executive Officer
                shall be held by separate individuals; provided, however, that
                if in the future the Chairman of the Board is not-independent
                then a Lead Director who is independent shall be chosen (as
                noted below) and under such circumstances the Chairman of the
                Board and Chief Executive Officer may be held by the same
                individual.

        D.      The Compensation Committee shall recommend for review by the
                Board annual and long-term performance goals for the Chief
                Executive Officer and evaluate his performance against such
                goals and other relevant factors such as the performance of the
                Company's peer companies.

        E.      During its consideration of the compensation of the Chief
                Executive Officer, the Compensation Committee shall meet in
                executive session, without the Chief Executive Officer.

        F.      The Board's Committees shall have standing authorization, on
                their own decision, to retain legal and/or other advisors of
                their choice, which advisors shall report directly to the
                Committee and whose reasonable fees and expenses shall be paid
                by the Company.

        G.      The Board of Directors shall adopt a resolution setting forth
                the following compensation principles:

                                       A-3



                        (a)     Compensation arrangements shall emphasize pay
                                for performance and encourage retention of those
                                employees who enhance the Company's performance;

                        (b)     Compensation arrangements shall promote
                                ownership of the Company stock to align the
                                interests of management and stockholders;

                        (c)     Compensation arrangements shall maintain an
                                appropriate balance between base salary and
                                long-term and annual incentive compensation;

                        (d)     In approving compensation, the recent
                                compensation history of the executive, including
                                special or unusual compensation payments, shall
                                be taken into consideration;

                        (e)     Cash incentive compensation plans for senior
                                executives shall link pay to achievement of
                                financial goals set in advance by the
                                Compensation Committee;

                        (f)     The Nominating and Corporate Governance
                                Committee shall review annually the compensation
                                of directors.

        H.      The Board of Directors shall adopt a resolution broadening the
                mandate of the Nomination Committee to make it the Nominating
                and Corporate Governance Committee, which Committee's functions
                shall include:

                        (a)     The Nominating and Corporate Governance
                                Committee, in consultation with the Chairman of
                                the Board, the Lead Director (if the Lead
                                Director is not also the Chairman of the Board)
                                and the Chief Executive Officer, shall be
                                responsible for periodic review and
                                interpretation of the Company's Corporate
                                Governance Policies and the Nominating and
                                Corporate Governance Committee Guidelines, as
                                well as consideration of other corporate
                                governance issues that may, from time to time,
                                merit consideration by the entire Board;

                        (b)     The Nominating and Corporate Governance
                                Committee, in consultation with the Chairman of
                                the Board, the Lead Director (if the Lead
                                Director is not also the Chairman of the Board)
                                and the Chief Executive Officer, shall consider
                                and make recommendations to the Board concerning
                                the appropriate size and needs of the Board;

                        (c)     The Nominating and Corporate Governance
                                Committee, in consultation with the Chairman of
                                the Board, the Lead Director (if the Lead
                                Director is not also the Chairman of the Board)
                                and the Chief Executive Officer, shall consider
                                candidates to fill vacant

                                       A-4



                                Board positions. Candidates shall be selected
                                for their character, judgment, business
                                experience, time commitment, and acumen. Final
                                approval of a candidate shall be determined by
                                the full Board;

                        (d)     The Board shall establish performance criteria
                                for itself and evaluate itself and individual
                                members on a regular basis. Board evaluation
                                shall include an assessment of whether the Board
                                has the necessary diversity of skills,
                                backgrounds, experiences, etc., to meet the
                                Company's ongoing needs. Individual director
                                evaluations shall include high standards for
                                in-person attendance at Board and committee
                                meetings and consideration of absences; and

                        (e)     The Nominating and Corporate Governance
                                Committee shall consider policies relating to
                                the Board and directors, including committee
                                structure and size, share ownership, and
                                retirement and resignation.

        I.      The Board shall designate an independent director to act in a
                lead capacity to coordinate the other independent directors, as
                described below. The Lead Director may also serve as Chairman of
                the Board. The Lead Independent Director is responsible for
                coordinating the activities of the independent directors. In
                addition to the duties of all Board members (which shall not be
                limited or diminished by the Lead Independent Director's role),
                the specific responsibilities of the Lead Independent Director
                are to advise the Chairman of the Board (if the Lead Director is
                not also the Chairman of the Board) or to undertake the
                following:

                        (a)     determine an appropriate schedule of Board
                                meetings, seeking to ensure that the independent
                                directors can perform their duties responsibly
                                while not interfering with the flow of the
                                Company's operations;

                        (b)     prepare agendas for the Board and Committee
                                meetings;

                        (c)     assess the quality, quantity, and timeliness of
                                the flow of information from the Company's
                                management that is necessary for the independent
                                directors to effectively and responsibly perform
                                their duties, and although the Company's
                                management is responsible for the preparation of
                                materials for the Board, the Lead Independent
                                Director may specifically request the inclusion
                                of certain material;

                        (d)     direct the retention of consultants who report
                                directly to the Board;

                        (e)     ensure that the Governance Committee oversees
                                compliance with and implementation of the
                                Corporate Governance Policies and ensures that
                                the Chairman of the Governance Committee
                                oversees

                                       A-5



                                the process to recommend revisions to the
                                Corporate Governance Policies;

                        (f)     coordinate, develop the agenda for, and moderate
                                executive sessions of the Board's independent
                                directors, and act as principal liaison between
                                the independent directors and the Chairman of
                                the Board and/or Chief Executive Officer on
                                sensitive issues;

                        (g)     evaluate, along with the members of the
                                Compensation Committee and the full Board, the
                                Chief Executive Officer's performance and meet
                                with the Chief Executive Officer to discuss the
                                Board's evaluation; and

                        (h)     recommend the membership of the various Board
                                Committees, as well as selection of the
                                Committee Chairs.

        J.      the Lead Independent Director shall have the authority to retain
                such counsel or consultants as the Lead Independent Director
                deems necessary to perform her responsibilities whose reasonable
                fees and expenses shall be paid by the Company.

        K.      At each regularly scheduled Board of Directors meeting, the
                Company's Chief Financial Officer or his designee shall provide
                a report that includes year-to-date financial results and
                quarterly or quarter-to-date financial results that include the
                Company's financial condition and prospects, including but not
                limited to, as appropriate under the circumstances, a discussion
                of all reasons for material increases in expenses and
                liabilities, if any, and material decreases in revenues and
                earnings, if any, including any modification or adjustment of
                reserve accounts or contingencies and management plans for
                ameliorating or reversing such negative trends and the success
                or failure of any such plans presented in the past.

II.     SHAREHOLDER NOMINATED DIRECTORS

        A.      The Board through its bylaws or otherwise shall establish a
                procedure for shareholders to nominate one or two directors as
                detailed below.

                1.      Initial Review Process. As soon as reasonably
                        practicable after the execution of a Memorandum of
                        Understanding attaching as an exhibit this Corporate
                        Governance Term Sheet, Lead Plaintiffs' Counsel (or
                        their designee), in coordination with the Chairman of
                        the Board of Hanover (or his designee) shall seek to
                        identify potential directors. In undertaking this
                        process, Lead Plaintiffs' Counsel (or their designee),
                        in coordination with the Chairman of the Board of
                        Hanover (or his designee) shall contact each individual
                        or entity holding more than 1% (but less than 10%) of
                        the Company's common stock for the purpose of requesting
                        that such shareholder or shareholders provide the name
                        or names of candidates for Hanover's Board of Directors.
                        Lead Plaintiffs' Counsel, in coordination with the
                        Chairman of the Board, shall conduct an appropriate
                        review

                                       A-6



                        (including background information and interviews of
                        prospective candidates) and submit the names of the
                        individuals determined to be qualified (as measured
                        against criteria to be established by Hanover's Board of
                        Directors in the exercise of their business judgment) to
                        the Nomination and Corporate Governance Committee for
                        review.

                2.      Initial Selection Process. Hanover's Nominating and
                        Corporate Governance Committee shall review each of the
                        candidates submitted to it by Lead Plaintiffs' Counsel
                        and select from among them the two determined by the
                        Committee in the exercise of its business judgment as
                        the most appropriate for being added to Hanover's Board.
                        In the event that two are not selected from those
                        presented to the Nominating and Corporate Governance
                        Committee, Lead Plaintiffs' Counsel shall be advised of
                        this determination, including the reasons for it, and
                        shall be given an opportunity (utilizing the process
                        noted above) to continue to submit qualified candidates
                        until two candidates are identified. Once two candidates
                        are identified, the Nominating and Corporate Governance
                        Committee shall recommend to the Board, and the Board
                        shall, subject to its fiduciary duties, elect the two
                        candidates.

                3.      Vacancies Among Selected Directors. Should either or
                        both of the directors selected pursuant to paragraphs
                        (1) and (2) hereof cease to be on the board because of
                        death, resignation, disability or removal, Lead
                        Plaintiffs' Counsel shall have the right to initiate and
                        participate in the selection of a replacement director
                        or directors following the procedure set forth in
                        paragraphs (1) and (2) above.

                4.      Additional Term of Selected Directors. After their
                        initial election to the Board, the two shareholder
                        nominated directors shall be nominated by the Board at
                        the next annual election at which directors are elected
                        to serve for an additional one year term; provided,
                        however, that in the event either or both of such
                        directors die, resign, or are disabled or removed, or if
                        the Board determines reasonably and in good faith that
                        they should not be nominated, then Lead Plaintiffs'
                        Counsel shall have the right to initiate and participate
                        in the selection of a replacement director or directors
                        following the procedure set forth in paragraphs (1) and
                        (2) above.

                5.      Continued Election of Single Shareholder Nominated
                        Director. After the election of the two shareholder
                        nominated directors as specified in paragraph (4) above,
                        who shall serve for a term of one year, at the next
                        annual election of directors the Board, subject to its
                        fiduciary duties, shall only be obligated to nominate,
                        in its sole discretion, one shareholder nominated
                        director; provided, however, that nothing herein will
                        prevent the Board from nominating both shareholder
                        nominated directors; provided, further that in the event
                        either or both of such directors die, resign, or are
                        disabled or removed, or if the Board determines
                        reasonably and in good faith that they should not be
                        nominated, then Lead Plaintiffs'

                                       A-7



                        Counsel shall have the right to initiate and participate
                        in the selection of a replacement director or directors
                        following the procedure set forth in paragraphs (1) and
                        (2) above.

III.    INTERNAL AUDIT FUNCTION

        A.      Within six months of final approval of the settlement, the
                Company shall implement an intensive internal audit function.
                The Internal Auditor, who shall be appointed by the Board and
                who will report to the Audit Committee at least twice a year,
                shall monitor the Company's internal control environment,
                revenue recognition practices and its accounting practices. The
                Internal Auditor shall be responsible for devising an Internal
                Audit Plan for each fiscal year which will be presented to the
                Audit Committee of the Board of Directors. The Internal Audit
                Plan shall include assessment of the internal controls
                environment in order to ensure that appropriate financial
                reporting procedures are in place and being followed by the
                Company's employees. Appropriate Company operations as dictated
                by the Internal Audit Plan shall be subject to an internal audit
                review each year. A written report shall be prepared for each
                internal audit performed describing the internal audit's
                findings, opinions and recommendations, if any. As appropriate,
                after review and comment from potentially impacted operational
                departments, these written reports (together with any response
                from potentially affected departments) shall be directed to the
                Chief Executive Officer, Chief Operating Officer, Chief
                Financial Officer, General Counsel, and the Audit Committee for
                their review, and, if necessary, remedial action.

IV.     REVENUE RECOGNITION POLICY

        A.      The Chief Executive Officer and Chief Financial Officer shall be
                responsible for ensuring that the Company's revenue recognition
                policy conforms to the requirements of Generally Accepted
                Accounting Principles ("GAAP"), as currently in effect or as
                amended, and is implemented and utilized throughout the Company.
                The Chief Executive Officer and Chief Financial Officer shall
                report to the Board of Directors or the Audit Committee on a
                semi-annual basis regarding the implementation and operation of
                this policy. The Chief Executive Officer and Chief Financial
                Officer shall ensure that the Company revenue recognition policy
                is distributed to each Company employee who records or reviews
                the recording of revenue. Any questions regarding that policy,
                or its application, shall be directed to the Company's Chief
                Financial Officer, who shall, as appropriate, inform the Chief
                Executive Officer.

        B.      To the extent net income was benefited in the aggregate for a
                quarter by the modification or adjustment of any reserve or
                contingency amounts, of more than the one percent of quarterly
                revenue such modification or adjustment shall be clearly
                disclosed in the quarterly statements.

                                       A-8



V.      STOCK OPTIONS

        A.      Subject to the adoption of guidelines by the FASB and compliance
                with any such guidelines, the Company will either fully expense
                all stock options going forward or shall provided sufficient
                disclosure in its periodic reports to allow shareholders to
                determine the expense impact of granted options.

VI.     ANNUAL AUDIT OF FINANCIAL STATEMENTS BY INDEPENDENT AUDITOR

        A.      So long as the Company remains a publicly traded company, the
                Company shall engage an independent auditing firm to perform an
                annual audit of its financial statements. The annual audit will
                encompass, as determined appropriate by the Chief Financial
                Officer and such independent auditing firm, a review of the
                financial results reported by each Company office to the Company
                headquarters. A written report of the results of each annual
                audit, including any findings, opinions or recommendations by
                the independent auditor shall be provided to the Chief Executive
                Officer, the Chief Operating Officer, the Chief Financial
                Officer and the Audit Committee of the Board of Directors for
                review and remedial action, if necessary.

        B.      The Company's independent auditing firm may not perform any
                consulting work for the Company, other than tax consulting work.

        C.      The Company shall rotate its independent auditing firm on or
                before March 1, 2008, and five years thereafter.

VII.    INSIDER TRADING CONTROLS

        A.      The Board of Directors will appoint an officer of the Company
                who will be responsible for effecting compliance with the
                Company's stock trading and market communications policy. That
                individual will be designated the "Trading Compliance Officer,"
                and will be responsible for developing (with Board involvement),
                presenting to the Board for approval, and monitoring and
                updating (with Board involvement and approval) a comprehensive
                program (the "Trading Compliance Program") designed to ensure
                compliance with the Company's trading policies. The Board will
                be responsible for direct oversight of the Trading Compliance
                Program and the Trading Compliance Officer, and the outside
                director (non-management) members of the Board will have direct
                access to the Trading Compliance Officer, including the
                opportunity to meet with the Trading Compliance Officer outside
                the presence of any other member of management. At least once
                yearly, the outside director members of the Board will receive a
                report from the Trading Compliance Officer outside the presence
                of any other members of management.

        B.      The Trading Compliance Program shall contain provisions with
                respect to transactions in the Company's securities by directors
                and officers of the Company which are no less restrictive than
                those set forth in the New York Stock Exchange Listed Company
                Manual and shall take into account applicable federal securities
                laws and regulations.

                                       A-9



        C.      During the pendency of any Company-funded open market stock
                buy-back program, no insider shall be permitted to sell stock.

        D.      Any corporate director or elected officer who acquires Company
                shares via option exercise, of options granted after Settlement
                Approval, must retain 33% of the net shares acquired, after
                taking into account the sale of shares to pay taxes and the
                option exercise price, for at least 12 months or such earlier
                time as the individual ceases to be a director of or an
                executive officer of the company as a result of death,
                resignation, termination or other reason.

        E.      The Company shall require the public disclosure of all sales or
                purchases of the Company's stock by any corporate executive
                officers or directors within 48 hours of such purchase or sale.
                Using Company stock or options to secure any loan to an
                executive officer or director or engaging in a swap, forward
                contract or other similar contract involving an executive
                officer's or director's stock shall be considered a "sale" and
                so disclosed. The Company will take reasonable steps to ensure
                that all directors and officers file all trading forms required
                by them to be filed by the SEC concerning trading by directors,
                officers, and executive employees of the Company.

        F.      Failure to comply with the Company's trading policy will result
                in appropriate sanctions, including disgorgement by the
                individual to the Company of all profits from the transaction,
                termination, or other appropriate disciplinary action.

        G.      No corporate officer or director shall directly or indirectly
                "short" the Company's stock or engage in "put" or call
                transactions involving the Company's stock.

VIII.   STOCK OPTIONS/CHANGE-OF-CONTROL

        A.      No stock option plan for corporate executives or directors may
                be adopted without a shareholder vote. Previously established
                stock option plans may not be modified to reduce stock option
                exercise prices or increase the number of shares available under
                the plan without a shareholder vote.

        B.      No corporate executive compensation plan adopted after the date
                of the final approval of the settlement may include any
                "change-of-control" definition that does not require the actual
                sale or merger of the Company to trigger a "change-of-control."
                A vote in favor of a merger or sale of the Company shall not
                constitute a "change-of-control." Provided, however, that any
                executive compensation plan may continue to define change of
                control broadly to include, among other things instances where
                (i) the Company sells, leases or exchanges all or substantially
                all of its assets to any other person or entity (other than to
                an entity wholly owned, directly or indirectly, by the Company),
                (ii) there is consummated a merger, consolidation,
                re-capitalization, reorganization or other similar transaction
                involving the Company, other than one in which more than 50% of
                the total voting power of the surviving entity outstanding
                immediately after such transaction is beneficially owned by the
                holders of the outstanding voting

                                      A-10



                securities of the Company immediately prior to such transaction,
                with the voting power of each such continuing holder relative to
                other such continuing holders not substantially altered in the
                transaction, (iii) the Company is to be dissolved and
                liquidated, (iv) any person or entity, including a "group" as
                contemplated by Section 13(d)(3) of the 1934 Act, acquires or
                gains ownership or control (including, without limitation, power
                to vote) of more than 50% of the outstanding shares of the
                Company' voting stock (based upon voting power).

IX.     CODE OF CONDUCT

        The Company shall create. maintain and disseminate to employees a code
        of conduct appropriate in scope and content which shall include, among
        other things, policies with respect to insider trading and proper
        documentation and accounting of transactions.

                                      A-11

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

     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 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 report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and we have:

          (a)  Designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, 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 report is being prepared;

          (b)  Evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          (c)  Disclosed in this report any change in the registrant's internal
               control over financial reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect, the registrant's internal control over financial
               reporting; and

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

          (a)  All significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and

          (b)  Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.

Date: November 13, 2003

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

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

     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 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 report;

     3.   Based on my knowledge, the financial statements, and other financial
information included in this 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 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-15(e) and 15d-15(e)) for the registrant and we have:

          (a)  Designed such disclosure controls and procedures, or caused such
               disclosure controls and procedures to be designed under our
               supervision, 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 report is being prepared;

          (b)  Evaluated the effectiveness of the registrant's disclosure
               controls and procedures and presented in this report our
               conclusions about the effectiveness of the disclosure controls
               and procedures, as of the end of the period covered by this
               report based on such evaluation; and

          (c)  Disclosed in this report any change in the registrant's internal
               control over financial reporting that occurred during the
               registrant's most recent fiscal quarter (the registrant's fourth
               fiscal quarter in the case of an annual report) that has
               materially affected, or is reasonably likely to materially
               affect, the registrant's internal control over financial
               reporting; and

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

          (a)  All significant deficiencies and material weaknesses in the
               design or operation of internal control over financial reporting
               which are reasonably likely to adversely affect the registrant's
               ability to record, process, summarize and report financial
               information; and

          (b)  Any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal control over financial reporting.

Date: November 13, 2003

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

EX-32.1

                                                                    EXHIBIT 32.1

                        CERTIFICATION OF CEO PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Hanover Compressor
Company (the "Company") for the quarter ended September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
Chad C. Deaton, as Chief Executive Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to his knowledge:

     (1)  The Report fully complies with the requirements of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.

/s/ Chad C. Deaton
- ------------------------------
Name:  Chad C. Deaton
Title: Chief Executive Officer
Date:  November 13, 2003

     A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.

     This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such
filing.

EX-32.2

                                                                    EXHIBIT 32.2

                        CERTIFICATION OF CFO PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Hanover Compressor
Company (the "Company") for the quarter ended September 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"),
John E. Jackson, as Chief Financial Officer of the Company, hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to his knowledge:

     (1)  The Report fully complies with the requirements of Section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

     (2)  The information contained in the Report fairly presents, in all
          material respects, the financial condition and results of operations
          of the Company.

/s/ John E. Jackson
- ------------------------------
Name:  John E. Jackson
Title: Chief Financial Officer
Date:  November 13, 2003

     A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.

     This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be
incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such
filing.